Does private credit kill HFs?

Steve schwarzman made some comments about private credit having low teens returns, with no risk and lower vol. compare to HFs targeting similar returns with much higher equity exposure and risk. Do allocators shift away from HF to these strategies? Ignoring citadel/MLP since they are almost impossible for new allocators to get in to start. 

 

The problem with private credit is you as a private lender will just keep agreeing to amendments and offering PIK to avoid EODs. The issue is that private equity funds usually give private loans to “friends and family” relationship lenders. Versus BSL where you have 50+ lenders you need to work with to get a majority vote, in PC, 1-2 lenders already make up a majority. 

 

Allocators are fine living in the dark. Private credit volatility is a charade, and at some point that will catch up to those involved, but it could be a long way away and in the interim AUM will continue to balloon.

 

As others said, PE/PC/VC have a huge structural advantage over HF/AM in terms of running the business, because they allow both the fund manager and the LP to keep their own jobs in downturns. They don't have lower vol but that vol is hidden away and nobody has to justify it to their boards. Everyone's goal is ultimately to keep their own job, not have the best fund performance.

 
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I think you can’t compare HF vs private credit. HF it is heterogeneous while private credit is just credit risk + illiquidity. Private credit has been relatively poor for years and now with higher rates gained traction, particularly within private market as people are stuck with underperforming PE portfolios. So Private Credit is eating up some PE allocation. HF I think it’s a different category and should be allocated to a different bucket. I don’t consider too much what managers are saying as they are tremendously biased (recent examples are AQR, Apollo, Blackstone). Private credit now is more attractive than before so it is for SOME hedge fund strategies. The skills required to analyze hedge fund strategies are higher than private credit and most of the allocators are clearly not there while consultants are biased as they just want fees. Another advantage of private credit is indeed the fake low volatility, but clients and consultants want this low volatility and they are happy to pay for it. In the short term private credit manager are seeing more inflows than HF, but I think it’s a cyclical within private credit and not as relative value vs HF.

 

(in terms of special sits direct lending vs stressed liquid HF)... PC is much less competitive (even now, yes) than credit HFs... you control documentation... and your destiny... you keep your job even after an unstable year... you get 200-300bps of extra spread off the bat for providing capital as a private lender (vs BSL)... higher returns on average going back the last 5 years at the fund level too... it's def eating at HF returns... HF competition, fed backstop, abundance of info, etc. has caused lotta public markets credit guys to go into private

 

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