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Ryan Kelly, senior portfolio manager and head of special situations at PGIM, by very dint of his role and job focus, enjoyed unaccustomed prominence at Asian Private Banker’s twin, back-to-back 2025 Wealth Summits in Hong Kong and Singapore in mid-October.
As the head of alternatives and investment solutions at one leading global private bank in Asia put it at the Hong Kong conference: “Private markets have dominated the headlines in the private wealth markets in the region in terms of new product adoption by family offices and UHNW investors in the past two years. And hedge funds have been the rebound kings of the past year. Given today’s increasingly unsettled credit markets, a hedge-fund strategy that is at the heart of the roughly US$1.8 trillion private credit market is going to find itself in the very centre of a Venn diagram of desire for both selectors and end-clients.”
Those unsettled conditions were borne from the last 15 years of market disruptions brought on by massive central bank policy responses, first to the global financial crisis (GFC) and more recently to the COVID-19 pandemic. As a result, the need for opportunistic credit strategies has grown substantially in recent years as large pools of inflexible capital have been finding it increasingly difficult to contend with the growing complexity in corporate credit markets.
Compelling opportunities in distressed and mezzanine debt
Kelly believes that the elevated complexity in today’s market is prompting this great unwind. “Our holistic market view is that complexity is now structural, and it will only increase over time,” he said. “It’s begun to seed what will become a cascade of opportunities as things begin to break regardless of the macro landscape. They’re breaking because the underwriting and the price at which so much capital in both credit and private equity markets has been deployed for so long at sub-optimal levels. Either the pricing was too high, or the underwriting was too poor, and the associated covenants were too light. Private equity will continue to struggle with exits, fund maturity walls, and maturity walls within their sponsored-led companies.”
All is not as it seems
So, while many observers of credit markets might be disarmed by US high-yield spreads currently in the top decile and investment-grade spreads trading at record tights, Kelly and his team are honing their strategic attention on special situations arising from both idiosyncratic and systemic dislocations. With borrowers currently enjoying a brief balance of power, he believes the opportunistic credit market is set for imminent and accelerated growth.
Kelly explained: “A lot of lenders in the broadly syndicated loan age have ceded flexibility to the borrower. In doing so, they have effectively transferred assets to their obligors. The latter now has significant room to manoeuvre in a world that is increasingly challenged. That means they have begun to use their embedded optionality to force lenders to bend to their will. They’re bringing forward to late 2025 and 2026 what might have been 2027 conversations on their future maturity, liquidity, or other issues because they see a window of opportunity to restructure capital structures and refinance earlier than expected.”
The upshot is an era consisting of increased volatility, a greater need for creative capital solutions, and a rise in liability management exercises (LMEs), which are characterised by market participants as “lender-on-lender violence”. “That’s why we’re seeing things break,” said Kelly, “we’re seeing significantly increased LME activity, more dispersion, more decompression—no matter what the surrounding macroeconomic overlay might be. And that’s what is getting us so excited—the opportunity set continues to expand.”
To that end, Kelly noted, being highly disciplined is the foundation for managing portfolio risk as these opportunities materialise, sourcing and due diligence are critical in special situations. Working with a counterparty of PGIM’s calibre helps to reduce dependence on market cycles for opportunities and allows for high selectivity when taking positions.
It's bigger than you think
Just how big it might become is potentially significant. The rapid growth of the leveraged finance market has seen it grow from around US$2 trillion at the end of the GFC to its current level of around US$4.5 trillion. Applying classic, median default-cycle metrics to the current debt stack would suggest cumulative defaults of around 30% over a five-year period. That would equate to several hundred billion dollars’ worth of defaults, and around US$1.5 trillion of associated distressed paper sitting alongside them. The amount of dry powder sitting in drawdown vehicles across the special situations and distressed segments of private credit is around US$100 billion and pales in comparison to this potential opportunity set.
The mismatch between the current size of the opportunistic credit market, around US$350 billion, and these potential levels of default and distress goes some way to explaining the fervour for the strategy at APB’s Summits.
A sense of urgency is also afoot: “Investors need to dial up their allocation to special situations strategies significantly if they are going to participate in a meaningful way,” said Kelly. “The opportunity is going to come quickly—probably more quickly than most people think—and in great size.”
Access Ryan Kelly’s latest Q&A on emerging credit opportunities in special situations here.
In partnership with Asian Private Banker
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