Man Group sees private credit opportunity in higher rates

Higher interest rates will create attractive opportunities for disciplined private credit lenders, despite the “growing pains” facing the sector, Man Group‘s head of U.S. direct lending has told CNBC.

Speaking with CNBC at the SuperReturn International private equity and venture capital conference in Berlin, chief investment officer Kevin Marchetti said credit fundamentals remain strong in the core middle market direct lending space in the U.S.

He was speaking the week after Blackstone said it was capping withdrawals from its flagship fund following a spike in redemption requests, and Switzerland’s Partners Group revealed it may curb capital withdrawals across several of its vehicles.

London-listed global alternative investment giant Man Group’s private credit business focuses on sponsor-backed deals in recession-resilient end markets, Marchetti said, where underlying default rates, losses and non-accruals are operating “well below” long-term averages.

“When you overlay that with tight financial covenants, which we have today, tight legal documentation, and good institutional ownership, I think what we’re seeing is an attractive relative value opportunity in our core sector,” Marchetti told CNBC’s Annette Weisbach.

The firm remains “laser focused” on how soaring energy costs and the prospect of higher inflation and interest rates in the U.S. are impacting the underlying portfolio companies in private credit funds.

“With inflation as it is, you have a likely higher-for-longer interest rate environment they’re going to operate in, that will drive, I think, a more attractive yield on these businesses,” Marchetti added.

U.S. annual inflation jumped above 4% to its highest level in three years on Wednesday. The consumer price index topped 4.2% in May, up from 3.8% in April, putting the prospect of Federal Reserve rate hikes back in the frame.

“Everything we do in the core middle market direct lending place is floating rate, so with benchmarks being higher, that’ll drive a more attractive yield on those underlying assets that we finance,” Marchetti said.