Justin Mitchell
Today we are speaking with Tim Lyne, the CEO of Antares Capital. Tim, increased interest rates have also increased interest and maybe demand for public fixed income assets. How is that affecting the demand for private credit and private debt, if at all?
Timothy Lyne
It's actually quite similar, so significant interest on the private credit side as well as kind of what you're seeing on the core fixed income side. Part of that is on the core fixed income, rates are up significantly, so some investors want to lock in that fixed rate. On the private credit side, the vast majority of it is floating rate, and I think for most pensions and other institutional investors, it really makes sense to have a diversified approach and hold both some fixed and floating rate, depending on kind of their duration, views on inflation, etc.
Justin Mitchell
What can an investor get from private credit that they can't get from public credit?
Timothy Lyne
By investing in private credit, you're generally earning a illiquidity premium because you're buying into these deals, it’s more of a buy and hold. And for many years, investors thought that the private credit deals, because they were smaller middle market companies, that there was a risk premium. That's really the 100-basis points premium you were receiving. But if you look over a very long period of time, defaults and losses are essentially the same in the private side as they are in the public side, and you're senior secured on the private credit, you're floating rate, you're earning that illiquidity premium, and essentially your losses and defaults are the same.
Justin Mitchell
Over the last decade or so, private equity has been a very popular asset class with public pensions, just because they feel like they can get so much better returns there than other places. How has the current market environment affected that sort of premium?
Timothy Lyne
The equity premium between kind of the debt and the equity returns is at the lowest point since 2009. So private equity kind of had a heyday during the low-interest rate environment. So obviously there was significant multiple arbitrage, they were buying companies at one multiple, let's say 12 times, selling them for 16. The debt was really cheap, and the economy was growing quite a bit. Now they're in a higher interest rate environment, a lower growth environment, and I'd say a riskier overall macroeconomic environment with inflation, interest rates, a potential recession, geopolitical uncertainty. And so, the private equity returns or the estimated returns over the next 5 to 7 years, I believe, will be lower than the returns that those private equity sponsors have generated over the last ten years.
Justin Mitchell
Tim, thank you so much for speaking with us today.
Timothy Lyne
Thanks for having me, Justin.