As the second quarter draws to a close, two seemingly disparate cross currents are evident that have implications for private equity and credit. One is a market in which capital flows are generous. The IPO market is red-hot like (sort of) 1999, while the market for middle market and broadly syndicated credits entails little pushback from lenders.
The other trend is the drop in interest rates. As this newsletter is being penned, the entire U.S. Treasury curve, with the exception of the 30-year, yields less than the Fed Funds target rate of 2.25% to 2.50%. It is not a new development. Rates have been trending lower since last November, and the forward 90-day LIBOR curve first inverted in June 2018.
To the extent curve inversion points to an oncoming recession, the credit markets are not yet reflecting it. High yield credit spreads are slightly higher than September 30, 2018, but are lower than year-end 2018.
Some believe the Eurodollar market is pointing to funding issues outside the U.S. that have been building for a year and have created a scramble for “good” repo collateral (i.e., U.S. Treasuries). That may be true, but as Ares Capital CEO Kipp DeVeers notes, the existing demand for assets outstrips supply in a world where yields are low and M&A and buybacks reduce the float of public equities.
If economic conditions do not change much and the market remains robust, then marks applied to private equity and credit investments probably will not change much over the balance of the year. Nonetheless, the bond market is credited with calling the economy well before equities and the Fed’s PhDs. Time will tell if the bond market is right again.
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Updated Metrics for
Private Credit and Equity
Publicly Traded Private Credit
Venture Capital