Coronavirus impact on credit funds

anyone?

Bump - curious as well

Congrats on the internship, exciting summer to join a credit team. The short answer is credit is the best place to be right now if you want to see deals getting done. Relative to other asset classes, capital is flowing into credit as the PE/M&A market is drying up. You have a bunch of business looking for rescue financings. Credit pros like the ones you’ll be working with will be busy structuring products to fill liquidity gaps. I’ll note that the types of deals will have higher return thresholds than what you’d see during normal market conditions in vanilla credits (ranging from mid single digits to low double digits). People in all markets need to be compensated for the uncertainty.

You kind of touch on this in your post but yes different areas of credit are being hit differently now. I’d encourage you to try to think through why during your internship. Just good learning experience. For example, look at how the first dollar of debt investments got hit by this shock vs middle of credit stack vs bottom vs the CLO, etc etc.Your shop will probably have all of these products and rewarding to get a grasp on each of them early in your career. Hope this helps.

How about Real Estate credit funds?

interested as well

The answer to this is going to be pretty fund-specific and how long this whole thing goes on (both direct COVID / shelter in place and the ensuing down turn). Everyone is going to be "affected," but exactly what that impact is is TBD. I would say that we're being highly selective in new opportunities that we spend any amount of time on and more attention is going to the existing portfolio, and a lot of funds are viewing the world in the same way.

It should still be a good time for an internship; it'll probably just affect the relative mix of new deal stuff vs. existing portfolio company stuff that you work on, which isn't necessarily a bad thing.

Funds will be marketing that the future opportunity set is amazing, meanwhile performance on existing investments is horrible

Would add a few bits to this from the perspective of a European mid-market credit fund;

• Yes funds will be impacted. It’s a mix, (1) those who extended themselves pre-Covid are more likely to get nailed (but it hasn’t happened yet, interestingly most of the credit funds in my space are fine due to plenty dry powder to support existing deals and everyone incl. sponsors and other lenders being rational), (2) then there’s those who already have distressed strategies or flexibility in the fund to buy at a discount, they’ll benefit the most. (3) Quite a few sit in a middle ground as they don’t have the flexibility to do distressed but haven’t extended themselves pre-Covid. They’ll likely sit it out and wait for pricing to return to a stabilised level.
• there is currently plenty focus on portfolio. Funds and the banks are focused on liquidity, the last ~4 weeks have seen lots of lender requests for covenant waivers etc. Interesting from an interns perspective to see how different businesses handle this negotiation, and how your shop reacts. Would be great for you to get to work on a few of these and see the different stages of “it’s fine”, “it’s not looking great”, “we’re probably going to lose money”.
• New opportunities are likely to be less vanilla, more opportunistic and price discovery might be tough. From an intern perspective, make sure you ask around about the environment pre-Covid. I’m finding it really interesting having only worked in a very competitive, tightly priced, “beat up on your lenders” type market. Lenders now are setting terms as opposed to being told them.