Inflation is increasing in an unprecedented manner in many developed and developing economies, putting greater pressure on the major reserve banks to raise interest rates.
In the United Kingdom, April inflation hit 9%, which is notably a 40-year high and the second highest inflation rate among the G7 nations.
In a recent update, Karen Lam, Director of Private Credit at M&G Investments, said that in this type of inflationary environment, the case for investing in short-dated private credit asset classes needs to be re-evaluated.
As noted by UK’s Blend Network, these asset classes “include floating-rate loans and instruments linked to a short-term interest rate, which could offer embedded inflationary protection and interest rate risk, thus providing relatively stable income streams.”
The Blend Network team also mentioned that “in truth, the current inflationary phenomena is a new phenomena for a generation of investors.” They added that “most developed markets at least, haven’t really faced protracted inflation since the 1970s – over the past 3 decades, inflation printed at around 2-3% a year, for the most part.”
So, “the question of how asset owners can ensure they effectively hedge against inflation risk has become an increasingly relevant question.”
According to Lam:
‘While a perfect (and costless) ‘hedge’ does not exist, there are several ways in which to hedge in more inflationary environments, beyond employing explicit, dynamic hedging strategies – largely by focusing on asset classes typically less affected by inflation or gaining exposure to assets which tend to rise in value in inflationary environments’. There are several examples of such asset classes. For example, commodities, particularly precious metals like gold have long been considered effective long-term inflation hedges. However, gold demand tends to be speculative and may be volatile. Furthermore, precious metals such as gold do not generate income streams.”
Another such asset class that has become increasingly popular in recent years, “first amid the uncertainty linked to the pandemic and now amid higher inflation, is private credit.”
An update from Bloomberg pointed out that at the height of the pandemic, ultra-rich families with cash on hand had “started to pile into private debt.”
Now, in a high inflation environment, M&G Investments “expect high carry, low duration private credit to flourish also with institutional investors.”
They believe “an attractive level of carry will be in high demand as fixed income investors are increasingly concerned over tight spreads and high asset valuations, inflation, and rate-hikes.”
The increased appetite for private credit from family offices and institutional investors “is also a trend” the team at Blend Network has observed.
The Blend Network team also shared:
“We recently announced that we had secured £120 million in committed capital from 6 family offices to deploy in the UK real estate private debt. Our conversations with family offices and institutional investors also reflect this level of increased appetite for private credit, especially in our segment of the market where market fundamentals remain solid on the back of the ongoing strength in the UK housing market.”