Investing in Direct Lending in Today’s Market Landscape
Speaking at the 2019 AltsMIA conference, Matt Harvey, Head of Direct Lending at PGIM Private Capital, paints a picture of the alternatives market landscape. Learn more about the current environment and the ways in which investors may expect to be impacted.
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Matt Harvey Introduction: I am Matt Harvey, Managing Director and Head of Direct Lending for PGIM Private Capital. I'm speaking today from ALTAMIA which is an alternative focused investment conference hosted here in Miami, Florida. I spoke today on the asset class of direct lending which is an asset class that PGIM Private Capital has managed and invested in for 20 years.
Matt Harvey on stage with panelists: Good morning everyone my name is Matt Harvey. I am managing director and head of direct lending for PGIM Private Capital. PGIM is one of the largest asset management companies in the world. We're backed by Prudential and run a multi-asset class manager model running about $1.4 trillion worldwidein private capital and direct lending.We focus on senior secured loans to middle market issuers both in the US and Europe focused on core middle market. So, companies with $10 to $100 million of EBITDA. And we do this in a fairly unique way, with indirect lending which is principally focused on the non-sponsored side of the market first. We run a 14 regional office network globally. We access opportunities with companies across the private capital risk spectrum and then use that regional office network to create a diversified portfolio, both sponsored backed and non-sponsored leverage loans transactions.
Jeremy Swan - Managing Principal CohnReznick: The private credit market has been around for a while but if we flash back to Dodd-Frank and the changes that occurred in the market that really helped accelerate the private debt market and the number of funds that have proliferated over the past however many years. Let's talk about that evolution. And from your experiences with your firms, prior firms, how did we get to where we are today. We're looking at in the near future close to a trillion dollars in the private debt markets. We've seen the tremendous growth. We've seen increased competition. Now we see some of the large commercial banks being able to step back into the leverage market. What are we seeing? How did we get to where we are?
Matt Harvey: I think from our perspective, if you observe this asset class over a long period of time, you go all the way back to the 1980s both in the US and Europe, 80% plus of leverage finance done in the marketplace was held by the banks. Today it's less than 20%, I think, in both markets. And so that structural theme, yes it was accelerated by Dodd-Frank and other regulatory reform to move that capital from banks into non-bank owners and create the opportunity set, but I think at this point it's much more fundamental than that because these assets are being held now by non-bank lenders, insurance companies, fund managers, and other outfits that have permanent capital or longer-dated capital to match the inherent volatility of the space.
I think the other thing when you think about capital formation trends, it's always the supply-demand dynamic.And we talked to institutional investors like many of you in the room, what the financial crisis did was reset the yield environment for liability matching. And so, if you think about insurance companies, sovereign wealth funds, and savings institutions around the world, and you look to markets like Germany where the bund’s trading under minus 70 basis points. The JDB is minus 30 basis points. You have this sort of inertia of capital forming around an asset class to produce excess yield.
That's what the direct lending and private credit market aims to do. We've got to prove our ability to manage that in a durable way through cycles, but I think again structurally the asset class is in a long-term phase of growth and I think goes beyond short-term regulatory dynamics.
PGIM Private Capital
A leading manager of private fixed income and alternative portfolios.