Volatile markets are undoubtedly challenging but can also provide investors valuable opportunities and insights. Take the current sell-off as an example: for the first time in over a decade investors are able to compare various asset managers and their strategies against the backdrop of a recessionary environment, which in turn can lead to better-informed investor capital allocations in the future.
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Volatile markets are undoubtedly challenging but can also provide investors valuable opportunities and insights. Take the current sell-off as an example: for the first time in over a decade investors are able to compare various asset managers and their strategies against the backdrop of a recessionary environment, which in turn can lead to better-informed investor capital allocations in the future.
Greg Branch, Chief Investment Officer at SCIO Capital says recent market volatility and higher projected default rates should separate the wheat from the chaff: “Given all the headwinds we’ve been seeing, there’s going to be a very clear delineation and bifurcation between winners and losers. We’ve seen a lot of lenders over the last several years focus on building AUM at the expense of prudent lending. And in these types of markets those chickens come home to roost.”
He believes that prudent managers who did not sacrifice lending standards for the sake of building assets under management will be rewarded for protecting their investors’ capital.
“We see the next one to two years as a fantastic lending opportunity across all sectors,” Branch declares. “You want to make loans during periods of market volatility, as these inevitably force banks and many traditional lenders to pull back, creating a funding gap, which of course, presents opportunities.” He believes that 2023 is likely to present lending opportunities not seen since the great financial crisis.
That said, he notes that while the current environment is demonstratively more attractive than a year ago, even better entry points in public markets are likely to manifest in the first half of 2023, followed shortly thereafter by private credit which tends to lag public markets by a few months.
Branch also details the advantages private strategies have over public credit in challenging environments: “First, private credit is not mark-to-market so prices are more stable. Second, the majority of private loans are floating rate, which means that as interest rates rise, the coupon rises to adjust for that.”
“Furthermore”, he adds, “because private credit transactions are typically bilateral and bespoke, they tend to have more carry, more credit support, as well as greater forms of protection built into them. This also means that when a credit underperforms, there exists a single set of counterparties dealing with one another toward a mutually beneficial outcome, rather than several competing counterparties all trying to advance their own specific agenda.”
Looking ahead, Branch is cautiously optimistic. “The current economic malaise will give rise in 2023 to some truly exceptional lending opportunities, but extreme caution is warranted given the multitude of economic and geopolitical risks facing investors. SCIO’s European asset-based credit strategy, emphasising capital preservation and downside protection, is well-positioned to weather the coming storm, ultimately providing higher and more consistent returns to investors.”
Greg Branch, Chief Investment Officer, SCIO Capital – Prior to founding SCIO, Greg was at Deutsche Bank AG London where he headed up the European ABS/CDO trading desk after joining in 2000 as Director and Head of Analytics for the Structured Products Group in Europe. Greg joined Deutsche Bank from Lehman Brothers in New York, where he headed the Commercial Mortgage Analytics group. Greg holds a Master’s Degree from Carnegie Mellon University and a degree in Aerospace Engineering from the University of Notre Dame.
