About this episode
Are private credit markets saturated with too much capital? Chief Market Strategist Troy A. Gayeski, CFA, shares the key takeaways from his new strategy note, Are private credit markets too good to be true—Or just factually true?
Troy joins Content Strategist Harrison Beck to analyze the opportunity set for private credit. He addresses frequent investor questions, examines key trends and dives into the latest data on this essential asset class.
“You have two discrete opportunities in private credit that you wouldn’t have dreamed of back then, sourcing assets directly from bank balance sheets and being able to provide short term financing vehicles for great companies.” –Troy Gayeski
Transcript excerpt
Harrison Beck: This is “The Takeaway with Troy Gayeski,” a podcast from FS Investments. We sit down with Chief Market Strategist Troy Gayeski to get the key insights from his latest strategy note. I’m Harrison Beck, FS Investments content strategist. I’ll take Troy through today’s top questions so that you can get the takeaway.
So, Troy, your new strategy note, it’s called, “Are private credit markets too good to be true—Or just factually true?” It’s a detailed, deep dive on private credit markets. It’s full of some amazing charts and some really actionable resources for answering tough client questions on private credit.
In this strategy note, you write that the opportunity set for private credit is still rich, and you take us through this two-part structure for answering investment questions, a top-down approach, and a bottom-up analysis. That’s how we’re going to have our conversation about this today. Tell us about this structure for understanding this question.
Troy Gayeski: I think for every investment strategy, we, along with other market participants, are trying to come up with the best strategies, the best investment opportunities, with the best risk-adjusted returns, and it’s very important to look at it from a top-down lens, right. A, to make sure you’re not missing anything, right. Because that’s really where things can go pear-shaped. Where, for instance, going into the Global Financial Crisis, if you’re unaware of the impending danger of the housing market, real problem. You just got completely obliterated. There are some really great investors, I won’t name them, that were big in banks and just had no idea what was going on. And so it really destroyed their careers. Similar to if you’re unaware of just the power of money supply growth driving assets higher.
So we’re always trying to look at whether it’s broader markets or individual strategies or individual trade theses. What is the top-down macro data telling us? Is there more risk, less risk? Should we be more concerned about this, less concerned about it? And so that’s always a staple of how we attack any opportunity. And then the bottom-up, it’s very important to triangulate top-down theory with bottom-up data, regardless of whether it’s a stock, a credit position, private or public. In this case, looking at market pricing. In fact, when we go through this discussion with investors, here’s what the top-down theory is telling us. But by the way, if you always ask me who’s winning the supply for credit or the demand for credit, the best way to answer that is look at current market pricing.
Because I could tell you all the top-down theory in the world, but if spreads were 200 over and we were about to have a recession and the Fed was going to cut to one percent, it’s a different situation. So, I think triangulating those two is important for any investment strategy. Unfortunately, both the top-down and the bottom-up in this case continue to argue for a robust opportunity for private credit—whether it’s commercial real estate lending, whether it’s asset-based lending or asset-based finance, or whether it’s middle market, upper middle market, cash-flow based loans to corporate, typically private corporate entities.
