Market turmoil could create private credit tailwinds, says Monroe’s president

Zia Uddin, president of Monroe Capital, told Alternative Credit Investor that private credit firms could benefit from current market turmoil as spreads widen and pricing improves in the US. Uddin, of the $24bn ($17.9bn) Chicago-headquartered manager, acknowledged that volatility is being driven largely by geopolitical tensions in the Middle East, which have fuelled energy price fluctuations and inflation concerns. He noted that alternative credit managers are typically insulated from broader macroeconomic headwinds such as foreign supply chain disruption and foreign exchange risk, and said the environment is familiar, pointing to the Covid-19 pandemic as a prior comparable period.

During uncertain periods, direct lenders are better placed to set terms, capturing wider spreads, better pricing and richer fee structures, Uddin said. "We have seen similar lender-favourable environments in the past, and we are beginning to see those conditions re-emerge with spreads widening," he said, adding that geopolitical events and upcoming US midterm elections often create attractive opportunities for private credit investors. He described the current stage as involving "a significant amount of price discovery" across the market.

The outlook is not uniformly positive. Managers told Alternative Credit Investor that uncertainty is making fundraising more difficult, with new investors hesitant to enter the asset class. Private credit's exposure to software companies, and fears that artificial intelligence could disrupt the sector, have already weighed on US business development companies (BDCs). Uddin said there is a "meaningful opportunity in software, but selectivity is critical," noting the environment has shifted away from a 'rising tide lifts all ships' dynamic. He said AI is among the most transformative developments of his lifetime but does not imply that an entire asset class will be displaced, adding that there will be both winners and losers.

Uddin argued the private credit industry will remain a multi-trillion-dollar market despite software concerns and recent BDC redemptions, and said institutional investors continue to allocate capital to the asset class. He characterised much of the BDC movement as driven more by market narrative than underlying fundamentals, while cautioning that the impact of recent events in the US wealth market remains uncertain. He expects spreads to keep widening and manager performance dispersion to increase. "The era of easy beta is likely behind us," he said, adding that it will be interesting to see how retail capital factors into the private credit landscape.