Inflation is soaring in many developed and developing economies, putting increased pressure on the major central banks to raise interest rates. Here in the UK, April inflation hit 9%, a 40-year high and the second highest inflation rate among the G7 countries. In a recent piece[i], Karen Lam, Director of Private Credit at M&G Investments, argued that in such an inflationary environment, the case for investing in short-dated private credit asset classes must be revisited. 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.
In truth, the current inflationary phenomena is a new phenomena for a generation of investors. 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 ad now amid higher inflation, is private credit. A piece in Bloomberg at the hight of the pandemic described how ultra-rich families with cash on hand had started to pile into private debt[ii]. 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 we have witnessed at Blend. 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.
If you are interested in learning more about the private credit products that we offer, please contact us today and a member of our team will be delighted to schedule a meeting with you.
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[i] Source: ‘Protecting portfolios from inflation? Look to short-dated private credit’, https://bit.ly/3GB3vHd
[ii] Source: Bloomberg, Ultra-rich families with cash on hand pile into private debt https://bloom.bg/3x0G3yD