In conversation: Sriram Reddy, Managing Director, Head of Client Portfolio Management, Discretionary at Man Group

Ahead of the Private Equity Wire Private Credit European Summit, Sriram Reddy, Managing Director, Head of Client Portfolio Management, Discretionary at Man Group, talks to us about the credit landscape, the asset classes on his radar and marrying public and private exposures. 

Private Equity Wire (PEW): You recently changed roles (from Managing Director for Credit at Man GLG) to Head of Client Portfolio Management, which is part of the newly created discretionary division. Looking ahead, do you see any challenges or opportunities in credit?

Sriram Reddy (SR): We think the yield backdrop portends very attractive return potential for investors. We’re seeing yields from both public or private credit that we haven’t seen in decades, which is typically a very good starting point for what you can expect in total returns in the future.

Institutional and retail investors are starting to rethink asset allocations, looking at those yields as potential replacement for equities, or potentially a larger portion of their overall asset allocation. When you haven’t seen these level of yields for over a decade some investors are just looking to lock those in for longer. There are parts of the market, particularly on the public credit side of the coin, that look much more expensive. While yields look very attractive, credit spreads — that additional premium we’re getting for the default risks of companies — are not the cheapest they’ve been, so we believe it’s a time to be selective.

We do think some sectors and issuers are more susceptible to higher interest rates, higher inflation and slowing growth. Those are three key risk factors that we think that investors need to be aware of as we look to the future.

PEW: In a webinar you hosted earlier this year, you spoke about expecting more dispersion through this next portion of the credit cycle. How are investors responding so far, given the context?

SR: Typically, when we get to these late credit cycle periods, you tend to find more winners and losers within a particular sector or asset class. Again, we would expect the level of dispersion to accelerate as the impacts of higher interest rates, higher inflation and potentially slowing growth. These do not impact companies equally, so their earnings and cash flows will deviate. Ultimately, this will bring about additional dispersion in the marketplace, which, as active managers, we think is a very good environment as it allows us to try to identify those winners early. We are essentially trying to avoid or minimise exposure to those we think are less well positioned in the current market environment.

PEW: Man Group published its quarterly credit outlook earlier last month: could you walk us through some of the findings? Which asset classes or credit strategies are investors showing the most interest in?

SR: Payment defaults have not picked up aggressively in either the syndicated loan or the high yield bond market, but we are seeing more liability management transactions — these are additional tools that companies can use to manage their balance sheet — across both those markets, which is enabling more opportunistic credit investments.

We’ve also been looking at an unloved asset class: emerging-market debt. Investors have shied away from this area since the Fed started to aggressively raise policy rates, which tends to be very negative for emerging markets as they’re funding in hard currency in dollar-denominated debt and their interest costs will rise. Looking at foreign currency debt, particularly from a sovereign perspective, spreads are similar to other parts of the market in that they are trading at very expensive levels. It’s an asset class we’re keeping on people’s radar, but we would say it is not a time to buy the entire market –especially given recent volatility.

There is also more demand for credit risk sharing (CRS), or significant risk transfers (SRTs); these deals allow us to work with banks to help them relieve some of the burden that comes with the regulatory capital charges in the typical type of lending that they’re doing for companies. Some types of bank activity are important in maintaining relationships with companies, but aren’t very profitable, so it can be difficult from a capital charge perspective. There have been some fits and starts in the US and we have seen supply broadening beyond Europe, as well as possible opportunities in Canada and Asia.  With spreads at decade highs this remains another attractive opportunity for investors.

PEW: Will you be drawing on some of these themes during your panel at the summit?

SR: Absolutely. I think the valuation arguments — the opportunities and threats — are something to talk about. Significant risk transfers (SRTs) are also interesting: they’re a part of private credit that may or may not historically have had much focus.

Another interesting conversation we’re having with clients is around large asset allocators investing across both public and private, and trying to understand how they should marry those two exposures together.

We also see a lot of opportunities in middle market direct lending: there are thousands of these companies in the US that make up a large part of the overall GDP. We’re in an environment where the availability of bank lending remains a challenge and there is this push and pull factor, with private credit stepping into an area that has historically belonged to bank lending.

PEW: What are you hoping to gain from the day?

SR: I’d like to hear about the experiences of other allocators and investors. It’s very informative for us to understand where the pockets of demand are, to discuss structures and see how things are developing in terms of what types of vehicles clients want.

I also want to understand people’s perspectives on the market and the credit cycle, how that reflects in terms of positioning within the portfolio and how the implications of market events may be impacting portfolios.

Want to learn more?  Join us at the Private Equity Wire Private Credit European Summit on Thursday, 16 May at etc.venues County Hall, London. Register for your complimentary pass here.  

* Please note that registration for this summit is only open to senior executives at fund managers and investors. If you are a service provider and would like to attend, please get in touch with us on [email protected].