Niche Private Credit Opportunities – the Best Risk-Reward Still Available?
Updated: May 16, 2022
A plethora of articles hit the press this past week suggesting serious doubts of whether the mass amount of private capital raised over the past 15 or so months to take advantage of the expected credit crunch from covid could be invested. Those funds that raised capital early and deployed it quickly did well. However, most of these funds, generally labeled opportunistic or distressed credit (otherwise known as debt), were not able to do both. If they were able to raise the capital, they simply did not make investments fast enough, missing the quick recovery. Now sitting on large piles of cash, doubts are surfacing of whether these fund managers will end up returning sizeable portions of unused capital as they are no longer able to underwrite investments to their expected return targets.
Credit cycles usually take much longer to play out, but the unprecedented flood of government support from covid coupled with effective vaccines lead to a rapid bounce back for the economy. Stocks and bonds responded in kind. Whether there’s still upside in public markets will always be heavily debated, but it is a rare character these days claiming that stocks or bonds as asset classes are cheap. Despite this, we believe that solid returns can still be had in niche areas within private markets.
Hotels – Good Risk-Reward Opportunity in Private Credit
As we scan the investment landscape, one of our highest conviction areas is for distressed debt in the hospitality (hotel) space. This is a niche market, specifically targeting a ripe area within private credit. With the economy ripping back and the U.S. household savings rate at a high clip, Americans are scratching their travel itch. It will take some time to return to pre-covid levels, but the trend is clearly on the upswing. Occupancy and room rates are on the rise across the industry, and low-end hotels (“limited service”) are now fuller than before covid. We are expecting a multi-year recovery with returns above public and most private markets, coupled with good downside protection (debt ranks higher in the capital stack than equity). Just as we saw with other markets, we believe that this investment window is also rapidly closing.
As always, contact us to take a deeper dive on our analysis, and see how you might be able to take advantage of this opportunity while it is still available.
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