If this is a “golden moment” for private lending, where will things go? What are the risks? Higher interest rates and turmoil in regional banks earlier this year have boosted confidence in the recovery of private credit. According to data provider Preqin, the market is expected to grow from $1.6 trillion to $2.8 trillion this year. BlackRock takes a more optimistic view, predicting the market will grow to $3.2 trillion.

Mark Rowan, CEO of private equity firm Apollo, sees “de-banking” in its early stages, while John Gray, chairman of BlackRock, coined the phrase “golden moment” to describe conditions in private capital at the start of the year. .

If the new banking rules under Federal Reserve regulations are considered a catalyst, capital requirements for the commercial banking industry in the US are likely to increase by up to 35%, according to Oliver Wyman, the world’s leading management consultancy. company — and no wonder Jamie Dimon said. , head of JP Morgan, said private lenders would be “very happy.”

How things develop in the market will be a key issue not only for large firms and banks in the private market, but also for traditional asset managers who have begun to use the capabilities of the private market to avoid the extreme rise of passive asset management. . This coincides with at least 26 traditional asset managers buying or launching new private credit units in the past two years.

This shift confirms the extent to which the structure of the financial market has changed. 20 years ago, when I was working at Morgan Stanley, I noted in a research paper that investor flows would split into barbells. On the one hand, investors would flock to passive, exchange-traded funds to get record returns. They are cheap and convenient. On the other hand, investors looking for higher returns will use asset allocation with specialist fund managers who invest in private equity, hedge funds and real estate. For traditional “major” fund managers, caught between the two, they will be pressured to make their investment machines more specialized or merge to increase their size, which has already been achieved.

According to ETFGI, ETFs have grown from $218 billion in 2003 to $10.3 trillion last October, but what’s surprising is how unbalanced the situation has become in terms of returns, with management fees likely to account for half of the investment sector. to alternative asset managers in 2023 from 28% in 2003.

Central banks are now scaling back their quantitative easing, which was implemented to support economies and markets, which has traditionally supported corporate profits. Without these tailwinds, the pressures on fund managers become more severe. So, how will the transition to private lending proceed?

Currently, Preqin estimates that just 10 companies have received 40% of private credit resources in the last 24 months. There are three reasons why private credit growth has disproportionately favored these large firms.

First, a good amount of growth is expected from the sale of investment portfolios by regional banks, which have to reduce their debt and are forced to sell good assets. The central bank’s new rules signal an inability for big banks to step up. In light of the large portfolio sizes and the speed required for transactions, the acquisition of these assets is a specialized venture that is in the interest of large companies that can underwrite the risks.

Second, a growing number of deals require more money, and August saw a new record for the largest loan, reaching $4.8 billion for fintech firm Finastra. The third and most important reason is that banks prefer to enter into partnerships so as not to lose access to customers. Even though tougher rules mean they have to divest assets, banks want to continue lending and partnering to help manage deal flows, which could benefit larger firms.

Several major banks have already closed deals and more are expected to follow. Citi is the latest bank to report its intention to launch a new unit in 2024.

A changing interest rate regime will mean loan losses rise as funding costs normalize and exposed weak balance sheets, which will be a source of challenges for private lenders. It may be unwise for new companies to try to exploit the growth. This requires a strong focus on the risks and rewards of selection and contracts, and teams that specialize in reconciliation, which many of the major players in the market have.

Of course, there will be key opportunities, such as hard credit or energy infrastructure credit, that are places that efficient companies can tap into, but they may not be on the scale that traditional companies need to maximize opportunities.

In general, a complete and comprehensive shift in capital allocation awaits us, requiring a major shift towards private credit, as Howard Marks recently argued, but the coming tide will not smooth all boats.

Islam Saeed wrote

Friday, December 1, 2023 06:30 PM

Since the beginning of the year, demand by central banks has increased by 14% year-on-year, reaching a new record level of 800 tonnes of gold.

Gold holdings reported by global central banks rose by a net 77 tonnes in September, as banks’ total sales of 78 tonnes were just 1 tonne, indicating strength in central banks’ gold purchases.

The World Gold Council showed that outflows from gold investment funds continued in October, but at a slower pace than in September, with outflows of $2 billion in October, the fifth consecutive monthly loss.

Since the start of the year, the funds’ investment holdings have declined by 6%, while the total value of assets managed by the funds has increased by 3% due to rising gold prices. Global outflows from gold-backed funds have reached US$13 billion since the start of the year. Equivalent to 225 tonnes of gold lost.

Gold neared a 6-month high in November on strong expectations in markets that the Federal Reserve has ended its interest rate hike cycle, and the time has come to set a date for a rate cut. Positive for gold prices.

Spot gold – at the time of writing the Gold Billion Technical Report – was trading at $2043 an ounce, up 0.4% after yesterday’s drop of 0.4% to a record low of $2031 an ounce.

In November, gold prices rose 2.6% to $53 an ounce, from a 6-month high of $2052 an ounce and a low of $1931.

Gold is on track to post a 2.2% gain this week, and prices are up around $43 an ounce, marking a third straight week of gains. October and November.

On the other hand, we see the US dollar post its biggest decline in a year in November, while the dollar index fell 2.9% to its lowest level in nearly 4 months. The Federal Reserve is holding off on raising interest rates, and it’s expected to start cutting interest rates in the first half of 2024.

As for the 10-year US government bond yield, it fell 12.3% in November to a nearly 3-month low of 4.247%, raising the prospect of gold gains due to its inverse correlation with gold. With bond yields, in addition to lower opportunity costs. As an alternative to gold, it does not provide income to its holders.

The current time frame sees the price of gold fluctuate below the resistance level of $2050 per ounce, before undergoing a negative correction in light of pressure on the price, before the price of gold reaches its all-time high targets of $2080 per ounce, then registers a target of $2100, and if the price breaks above the 2035 level, the dollar , until the 2025-2020 region, $ per ounce, after which the 2010 dollars support level will begin. ounce.

Following are the key events that influenced the gold price movement last November:

– Demand for safe havens, including gold, in financial markets has weakened as the war in Gaza has not reached a current ceasefire.

– The consumer price index (a key inflation indicator) in the United States of America fell to 3.2% in October, beating expectations of 3.3% and the previous reading of 3.7%.

The core personal consumption expenditure index (the Fed’s preferred inflation gauge) fell in October, bringing the annualized rate to 3.5%, down from the previous reading of 3.7% expected.

– Moody’s Credit Rating Agency downgraded the US outlook to negative after holding it steady while keeping the credit rating at its highest Aaa rating.

Moody’s pointed to rising downside risks related to US credit and debt as the main reason for downgrading the outlook.

– Minutes from the Federal Reserve Bank meeting showed bank members maintaining a tight monetary policy and a willingness to raise interest rates further if necessary, but with more caution.

Reports from members of the Federal Reserve show that if inflation rates continue to fall for more than a month, the bank may abandon some of its monetary tightening policy.

Oil prices fell in early trade – today, Friday – to continue losses that began after producers in the OPEC Plus alliance agreed to voluntarily cut crude output in the first quarter of next year.

Brent crude futures for February were down 0.4% at $80.5 a barrel by 7:34 GMT, while US West Texas Intermediate crude futures were down 0.3% at $75.7.

Saudi Arabia, Russia and other members of the OPEC Plus group – which pump more than 40% of global oil – have agreed to voluntary production cuts of more than two million barrels per day in the first quarter of 2024.

However, at least 1.3 million barrels per day of these cuts come from voluntary cuts already implemented by Saudi Arabia and Russia.

Representatives earlier said new additional cuts of up to two million barrels per day were under discussion.

OPEC Plus production – comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia – reflects a cut of about 5 million barrels a day aimed at actually supporting prices and reaching the market by about 43 million barrels a day. Stability.

Discount details

In a statement after the meeting, OPEC said the cuts totaled 2.2 million barrels per day from eight producers.

The figure includes Saudi and Russian voluntary cuts of 1.3 million barrels per day.

The additional cut of 900,000 barrels per day pledged on Thursday comes from 200,000 barrels per day of fuel exports from Russia and the remaining 6 members, Reuters reported.

The United Arab Emirates said it agreed to cut output by 163,000 barrels per day, while Iraq announced an additional 220,000 barrels per day cut in the first quarter.

Algeria plans to voluntarily cut its oil production by 51,000 barrels per day in the first quarter of 2024, while Kuwait announced it will voluntarily cut oil production by 135,000 barrels per day for 3 months from next January.

Saudi Arabia, Russia, the United Arab Emirates, Iraq, Kuwait, Kazakhstan and Algeria were among producers who said the cuts would be phased out after the first quarter if market conditions allowed.

Fears

OPEC Plus’ focus on cutting production comes in light of a slump in prices that hit $98 a barrel at the end of September, as well as growing concerns about weak economic growth in 2024 and expectations of a surplus in supplies.

This month, the International Energy Agency predicted a slowdown in demand growth in 2024, as “the last phase of the economic recovery following the Covid-19 pandemic dissipates and energy efficiency, the expansion of electric vehicles and structural factors combine.”

Member of Brazil

OPEC Plus invited Brazil to become a member of the group, and the Brazilian energy minister said he hoped to join next January.

Brazil is one of the world’s 10 largest oil producers and, as of 2016, the largest producer in Latin America.

Brazil’s crude oil production reached a record level of 3.7 million barrels per day last September, an increase of approximately 17% from the same month last year and a 6.1% increase from August 2023, according to “Argus Media”.

UBS analyst Giovanni Stonovo said, “Brazil is a big oil producer and a leader in crude production growth, so it’s important to get involved, but it doesn’t seem to be cutting production like Mexico, so it’s going to be good. OPEC Plus, and less important for the oil market.” “, according to Agence France-Presse reports.

The OPEC Plus alliance was formed in late 2016, when Russia and nine other countries joined OPEC to support lower oil prices, and from late 2022, the alliance relies on production cuts of about 5 million barrels per day.