An 8%% yield might become a 10% yield, or a 10% an 11%, and that's going to be pretty attractive. There's a real need in the institutional market for returns and income. The direct lending-market will still be very attractive even if rates rise, and the investment-grade market will be a little more attractive than it is now.
- So we'll still have this reach-for-yield dynamic?
I think so. I'm assuming that the higher-quality parts of the market go up 50 or 100 basis points. Most of the increase has been at the short end of the curve. The 30-year Treasury has come down a bit, so it's actually flattened out.
- Where do you look outside the U.S. for opportunities?
Last year, we invested about $13.5 billion globally, about 40% of that outside North America. In the U.K., we did about $2.5 billion of new investments — that's a very, very active market. We see Australia as a very attractive market as well, especially with a team on the ground in Sydney. We have an active infrastructure program, and that's pretty well-balanced between the U.S., Europe and Australia.
- Will Trump's deregulatory push get banks back to direct lending?
That's unclear. To date, most of the rollback has more been on businesses and the broader economy. There's really been no change in the banks' behavior toward taking risk or moving back into markets they backed away from.
- Any other trends in new entrants coming in?
Insurance companies outside the U.S. are getting more active in the private-placement market as they increase their fixed-income portfolios. The direct-lending market will continue to see institutional investors allocate capital. You've got pension plans — U.S., Europe, globally — and sovereign-wealth funds with lots of capital, coming into the direct-lending market, as well.
- What could derail growth in the direct-lending market?
With rates going up and leverage levels fairly high, there certainly could be something that triggers a bit of a correction in the direct-lending market. There's nothing I see right now that would suggest it's imminent. There will be a cyclical turn in that market — I can predict that with 100% confidence — but I can't tell you when it's going to happen.
- Where has risk in your strategy played out well?
Increasing our global rollout — we've opened an office in Milan, we've built up our London office, we're also in Frankfurt and Paris. We're very active in Latin America, so following the private-placement market globally has been a very good thing for us. It's broadened our origination capability, diversified our portfolio, and provided a decent amount of volume.
- Where it hasn't played out well?
One of the areas that I'd say a year ago we were working hard on was the energy markets. Obviously the oil-and-gas markets have been under stress since prices dropped in 2015-16. But that's actually worked out pretty well for us, and prices are back up around $60 a barrel. You always wonder what would happen in a downturn.
- How would you describe supply right now?
The private-placement market had a record year globally. There's just so much demand for return that there's more than enough capital to meet those needs. There's probably more capital than there is opportunity, which has kept spreads and returns pretty competitive for issuers. There's definitely a lot of money chasing whatever deals come to market.
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