Sector selection and portfolio construction are absolutely key to alpha returns and we’ll see it more visibly across managers in this new lending environment. Up to 2022, we saw some particularly hot sectors with businesses that, whilst strong credits, had secured overly high leverage which is now creating problems as base rates have increased and potential maturity refinance risks appear.
We expect this to create performance dispersion amongst managers, with some now spending significant time and resource dealing with portfolio amendments and restructurings. This is in contrast with those managers who remained disciplined and committed to sectors where they have developed significant knowledge and a level of expertise, and crucially, arranged finance at lower attachment points.
For those underwriting new deals in 2023, there are green shoots. For example, strong credit sectors such as SaaS businesses, professional services and healthcare (always a go-to owing to its acyclical nature), are now returning to more normalised valuations and lower leverage levels. Combined with higher base rates and more lender friendly terms you can see why the private debt sector is one of the most attractive assets classes in alternatives.
At Investec, we diversify within our sector selection whilst remaining committed to certain market thematics where we have built expertise through our experience. It means we are credit-pickers, and our investments are protected through a combination of diversification and a true understanding of the businesses we’re backing.