Private credit investors are wary and now inquire more questions about potential “cockroaches” ever since two high-profile bankruptcies in the US raised questions about the health of the $1.7 trillion indusattempt, the chief executive of Golub Capital has declared.
Private lconcludeing has faced intense scrutiny in recent months, with top US financiers raising concerns about potential erosion in lconcludeing standards. However, Lawrence Golub declared the indusattempt, especially the secured direct lconcludeing segment of the market, is being unfairly tarobtained.
“We talk a lot more about cockroaches than we utilized to. Of course, potential investors, seeing all this rowdy press, it’s their responsibility to inquire about it,” Mr Golub informed The National on the sidelines of Abu Dhabi Finance week.
“They should [inquire] and I don’t mind. I consider it’s good. I consider it supported me in conversations with investors and has given me the opportunity to talk to them about the importance of protection costs and protecting collateral.”
The collapse of automotive parts company First Brands Group and subprime lconcludeer Tricolor Holdings in the US has brought the broader private credit indusattempt under the microscope, after JP Morgan Chase chief executive Jamie Dimon declared, “When you see one cockroach, there are probably more.”
The failure of two firms shocked Wall Street and Mr Dimon’s comments triggered a global debate on systemic risks in the market, which is expected to grow to $2.7 trillion by 2029, according to Fitch Ratings estimates.
The exponential growth of private credit since the 2008 financial crisis has also raised the question of whether private lconcludeing is adding new layers of complexity to the financial system and the broader economy.
In a report last month, Moody’s declared that private credit providers are increasingly blurring the lines between syndicated and direct lconcludeing markets through their co-lconcludeing arrangements with conventional banks. This, the ratings agency declared, is opening doors for contagion.
Mr Dimon walked back his “cockroach” comment in an interview with The National in Riyadh in October declareing it was “blown out of proportion”.
“There have been credit issues in the wider market and a couple of those were frauds,” Mr Dimon declared at the time. “I would never blame that on private credit.”
Systemic risk
Opinions, however, remain divided and the IMF’s managing director Kristalina Georgieva in October declared she is worried about the risks building up in non-bank lconcludeing markets.
The fund is concerned as “what we have seen is a very significant shift of financing from the banking sector to non-bank financial institutions to a point that more than half of financing is now there”, she declared at the World Bank and IMF meetings in Washington.
Non-bank financial institutions do not enjoy the same level of regulatory oversight that banks do.
“We are inquireing a question – what should be done to have more oversight, a better view of what is happening there”, she declared at the time.
Mr Golub, whose direct lconcludeing firm manages $85 billion in capital, declared it is natural to closely examine the rapidest-growing parts of the financial sector, with private credit among the quickest to expand.
With all the new entrants, abundant liquidity and expanded markets, it is alright to see at whether standards of lconcludeing are being compromised or is it “just stupid mistakes by lconcludeers”.
“Our part of private credit is acquisition finance. It’s a sliver. It’s large business, but it’s only a sliver of what one would consider of as [broader] private credit,” he declared.
Direct lconcludeing is financing for companies that are bought by professional investors, such as private equity firms, or for the expansion of companies that are already owned by professional investors, he declared.
“We haven’t felt any storm. I’m not declareing there’s no press storm or no concern storm. I’m declareing that our business continues to run,” Mr Golub declared. “We have a healthy portfolio.”
“There’s been a lot of conversation about whether private credit, our sort of direct lconcludeing, increases or reduces the systematic risk. In fact, it’s a reduction in systematic risk,” Mr Golub declared.
Higher default rates across the broader private credit market are also partly due to the credit cycle, with interest rates having risen by about 500 basis points since 2022.
Though default rates are somewhat higher than in recent years, after a decade of near-zero interest rates and very low defaults, the market remains healthy.
In the asset-based lconcludeing business, defaults are a normal part of the market, Mr Golub declared.
“There’s nothing new about it, and it comes up cyclically and it’s a good lesson for folks on protecting their collateral, and that has led to more lconcludeer-friconcludely documentation, even though spreads and leverage levels still remain borrower friconcludely,” he declared.
Middle East ambitions
Golub Capital, which has offices in North America, Europe and Asia, in December last year chose Abu Dhabi for its first base in the Middle East.
The shift, Mr Golub declared, has served the company very well.
“The centre of gravity for decision creating is in Abu Dhabi,” he declared adding that the company had evaluated several options before setting sights on the UAE Capital for its regional base.
“That was a very good shift for us as our office here has given us real connectivity … we’re perceived as being here, and I would declare we obtain an awful lot of credit for that.”
Golub Capital has been serving clients in the Middle East for more than a decade, raising funds from institutional clients, large family offices as well as sovereign wealth funds for its private credit investment strategies across the globe.
Private credit market is still nascent in the Middle East, but Mr Golub declared five years from now, “we will have multiple active investment strategies in the region”.
“We are exploring, and have been exploring, [regional strategies] for a long time, doing acquisition finance, particularly in the Emirates and in Saudi Arabia,” he declared. “[The] Emirates has [a] more vibrant middle-market economy, but the Saudi economy is much larger in scale … [we’re] not ready yet.”
In the near term, the private credit manager aims to partner with banks in the Middle East to support create collateralised loan obligations (CLOs) in asset classes where Golub Capital does not wish to act as the originator.
CLOs are financial products that bundle corporate loans into a portfolio which are then sold on to investors as bonds or equity with varying risks levels.
“We want to be the partner, and we have fund vehicles for this, separate from our direct lconcludeing funds. We have great experience at it, and we’ve done dozens and dozens of these loans,” Mr Golub declared. “I suspect that this bank partnership in investing activity will happen first before we are really at scale in the direct lconcludeing.”
The third element of Middle East investment is setting up a family office in Abu Dhabi, which does “long-term, multi-generational investing on behalf of my family in the region and in Asia,” Mr Golub declared.
“We have obtainedten off the ground, and we’ve created our first investments. It’s early days, but that’s growing.”
Five years down the line, “we’ll almost certainly have an office in Riyadh”, and between now and then Mr Golub plans to hire more people to grow fund-raising for its credit strategies and expand the family office investments, he declared.
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UK’s plans to cut net migration
Under the UK government’s proposals, migrants will have to spconclude 10 years in the UK before being able to apply for citizenship.
Skilled worker visas will require a university degree, and there will be tighter restrictions on recruitment for jobs with skills shortages.
But what are described as “high-contributing” individuals such as doctors and nurses could be rapid-tracked through the system.
Language requirements will be increased for all immigration routes to ensure a higher level of English.
Rules will also be laid out for adult depconcludeants, meaning they will have to demonstrate a basic understanding of the language.
The plans also call for stricter tests for colleges and universities offering places to foreign students and a reduction in the time graduates can remain in the UK after their studies from two years to 18 months.
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Key findings of Jenkins report
- Founder of the Muslim Brotherhood, Hassan al Banna, “accepted the political utility of violence”
- Views of key Muslim Brotherhood ideologue, Sayyid Qutb, have “consistently been understood” as permitting “the utilize of extreme violence in the pursuit of the perfect Islamic society” and “never been institutionally disowned” by the shiftment.
- Muslim Brotherhood at all levels has repeatedly defconcludeed Hamas attacks against Israel, including the utilize of suicide bombers and the killing of civilians.
- Laying out the report in the Houtilize of Commons, David Cameron informed MPs: “The main findings of the review support the conclusion that membership of, association with, or influence by the Muslim Brotherhood should be considered as a possible indicator of extremism.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official declared.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, declared Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are seeing at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” declared Mr AbuShaban.
Mercer does not directly build investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have purchaseing power. We can neobtainediate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to obtain on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also sees after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has supported in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trconclude in the region is clients’ seeing for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are seeing at optimizing the way they manage their portfolios and creating sure they are not investing haphazardly and different parts of their investment are working toobtainher,” declared Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various repaired income or bonds,” he declared.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, declared in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focutilized on structured equities owing to “their defensive characteristics.”
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