This post is part of Cadence’s 2020 Private Credit Yearbook, taking a close look at private credit in 2020 while discussing what’s to come for this year. Stay tuned for the full Yearbook and more posts from the Cadence team.
Considering the ongoing effects of COVID-19 on the global economy into the start of 2021, our expectation is that credit investors will remain steadfast in their unrelenting search for yield that continues to be the overarching theme since the global financial crisis over 12 years ago.
All major central banks will want to ensure the path to recovery is well underway before considering any significant tightening in monetary policy. In fact, some countries are expected to cut benchmark rates even further this year.
“In Bloomberg’s quarterly review of monetary policy that covers 90% of the world economy, no major western central bank is expected to hike interest rates this year.” (Bloomberg News)
Accordingly, in one of its last announcements for 2020, the Federal Reserve of the United States also stated that they would keep buying government bonds until the economy made substantial progress, which provides further assurance to financial markets while simultaneously keeping borrowing costs low. Another check on policy changes continues to come in the form of a still-struggling job market, a key area of focus for the Federal Reserve. Despite a sharp reduction in unemployment rates from the 14.7% record high in April at the onset of the pandemic, unemployment claims rose again towards the end of 2020 as surging COVID-19 rates slowed hiring and led to more layoffs.
In this continued low-interest rate environment, we also expect to see further credit spread compression, particularly in higher yielding markets.
In a recent publication by Amundi research center, they stated “…credit spreads have tightened to nearly pre-coronavirus levels. Investment grade spreads have narrowed to about 2.3% points over Treasuries, after jumping to their highest level since 2009 in March. High-yield spreads also stayed at the 6% point range over Treasuries after rising to above 11 percentage points in March.” (Amundi)
With benchmark rates hovering near all-time lows and credit markets reverting back to historically tight levels, savvy credit investors that are not inclined or mandated to extend duration or move down the credit spectrum are increasingly turning to well-structured private credit.
According to the Alternative Credit Council’s latest “Financing the Economy 2020” report, “Institutional investors have been increasing their allocation to private markets for some time” and they continue, “The growth in allocations to fixed income is often driven by demand for assets that can generate income, provide diversification, hedge against risks during equity bear markets, and offer liquidity. Private credit is extremely well placed to provide the first of these at a time when traditional fixed income assets are offering either minimal returns or even negative rates. Identifying assets that can do the same in public credit markets at the current time can be much more challenging.” (AIMA)
For 2021, we expect the overall demand for private credit — and particularly Cadence note programs — to continue growing as investors search for yield outside traditional fixed income investments. We also believe that the modifications made to the Accredited Investor Rule will also broaden the accessibility of private credit to a larger population of individual investors, driving further demand into the private credit asset class.
After starting 2021 with thirteen Cadence note programs, we are gearing up to announce new strategic partnerships with private credit originators in Q1 2021. We expect that, by end of the year, we will nearly double the number of originators on our platform. We also plan on increasing the volume outstanding with our existing originators as they ramp up for growth after a complex 2020, in which most of them focused on managing their growth trajectory conservatively amid the unprecedented crisis.
We are also continuing to develop CadencePrime note programs by sourcing longer-term and more bespoke note structures for new and existing originators. Combined, we expect to have a broader array of opportunities available for all Cadence investors, ranging from 2-month notes to 4-year notes, while also maintaining a diverse pipeline of opportunities based on asset class, expected returns, and credit enhancements.
On a final note, as Cadence continues to deliver on graduating private credit originators from our Cadence and CadencePrime note programs into the institutional market, we have the unique opportunity to tactically bring transparency and standardization to the asset class as a whole. We are on a firm trajectory to bring the public market standards we are adopting and the technology we are building from our corner of the private credit market directly to the broader private credit market by acting as a trusted advisor, underwriter, and placement agent. We are at the crossroads of where market opportunity bolstered by positive trends meets unprecedented innovation, and we are excited for the impact we will have within private credit during 2021 and beyond.