Speakers:

• Jackie Brady, Head of Global Debt Solutions, PGIM Private Alternatives
• Matt Harvey, Head of Direct Lending, PGIM Private Capital
• Pinto Suri, Principal & Credit Analyst, PGIM Fixed Income
• Cameron Lochhead, Global Head of Institutional Relationship Group, PGIM (Moderator)

Non-bank lenders and institutional investors have adopted a much larger role in financing the economy since the global financial crisis. The emergence of a higher-for-longer regime has brought new momentum behind private credit's growth as an asset class, with investors searching for diverse opportunities to capture yield. But a credit-risk approach that looks at private credit separately from public is no longer suitable due to the growing overlap between the two segments.

Given the uncertainty that continues to pervade the macro and investment landscape, investors must take a broad view of credit markets to identify risks and opportunities as they emerge. PGIM brought together experts from its affiliates to discuss the interplay between public and private credit, how asset owners and allocators can manage risk in the current environment, and where investors can find new possibilities across the credit spectrum. The following is a summary of the discussion.

• Market and regulatory evolution: The lending environment has been far more restrictive following the GFC, and money had been relatively cheap up until the last two years. With issuers exhibiting greater discipline, lending markets have also reduced excess leverage that was a hallmark of the pre-GFC years. While the environment is more favorable today, the end of the economic cycle may be near, and the market is experiencing some terms erosion due to tight loan supply. Investors should also be mindful of hidden leverage given the complexity of the current lending system. The market's complexity, as well as rapid growth in private credit, creates a challenging regulatory picture as leveraged loan activity shifts from banks to long-term investors. Experienced managers who are transparent about their origination process, including the use of covenants, may differentiate themselves from new entrants to the market.
• Investment approach for a new credit cycle: Investors searching for opportunities in private credit can benefit by looking beyond crowded parts of the market where banks are more active. This approach also allows direct lenders to be more selective by expanding the pool of borrowers. Lenders across the credit universe will benefit from remaining disciplined in an uncertain risk environment. Investors should seek out managers with extensive workout experience, a selective approach to origination, good covenants, and a strong culture around managing risk.
• Opportunities emerging from volatility: Credit stress can create opportunities for investors with dry powder. Banks are rethinking their approach to maintaining capital adequacy as balance sheets come under stress, prompting them to sell good assets that can be appealing to real estate investors. Similarly, public real estate equity valuations may have over-corrected, and the market is exhibiting signs of dislocation with strong assets in weaker hands. This has created an attractive entry point in REITs. In private credit, investors can avoid value compression in more competitive parts of the market by lending to non-sponsored companies in the middle market, which offers a broader opportunity set to uncover value. Meanwhile, volatile credit cycles can unlock equity upside in mezzanine financing.