While risk asset prices and valuations keep rising, yields on traditional fixed income (i.e. “yield securities”) are falling. Lower volatility fixed income securities (e.g. investment grade bonds and municipal bonds) are key a component of portfolio diversification, and have historically compensated for their limited appreciation potential with stable prices and consistent single-digit yields. However, as rates have trended down over the past decade and supportive monetary policy has become status quo, fixed income has experienced yield declines of as much as 50%.
This erosion of yield has pushed income investors to equities and lower quality credits to help replace lost yield. And while these investments can help to replace some lost yield, they carry higher risk profiles and increased correlations to broader equity markets.
Looking for yield? Private lending markets are growing
Private lending markets have rapidly grown over the past three decades as middle market companies look to private investors (including large non-banking institutions) to provide corporate financing. Recent data from JPMorgan suggests that nearly 84% of leveraged loan market participants are now non-banks (vs. just 28% in 1994), and nearly 15% of corporate financings now occur from institutions and private lending.
These changing dynamics in Private Lending are creating opportunities for investors. Companies accessing private markets for debt lending typically pay a premium (i.e. higher interest rates) vs. public market securities, and are also typically required to open themselves up to increased due diligence and underwriting from private lenders. Strong teams of credit analysts can different credit quality, and so just as there can be different credit qualities in public fixed income (e.g. Investment Grade vs. High Yield) there are similar distinctions and opportunities for investors in private markets.
For investors seeking durable, stable yield from portfolios, private debt markets (and other alternative investments) present interesting opportunities. In this environment investors that rely on portfolio income need to adapt, including looking to new asset classes (e.g. alternatives) and implementing strategic capital gains redemption strategies.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.