CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In our second episode of the Alternative Allocations podcast series, I was joined by Rich Byrne, President of Benefit Street Partners. Rich and I explored the opportunities in alternative credit strategies. Specifically, we examined the attractiveness of private credit, distressed debt and real estate debt in today’s market environment.
We began by discussing the challenging economic backdrop and the impact of the collapse of Silicon Valley Bank (SVB). Rich discussed the difference in managing portfolios that are fully invested versus putting new capital to work today: “Two things can exist at the same time. There's going to be a big challenge for existing portfolios, but at the same time, we think for new capital, there's going to be one of the best investment opportunities we've seen, maybe even since the global financial crisis.”
Rich discussed his paper released earlier this year, “Private debt market outlook: The opportunity of a lifetime?,” where he uses the Titanic as a metaphor for financial markets. By the time the captain saw the tip of the iceberg, it was already too late for the ill-fated ship. The iceberg in the financial markets was the rising interest-rate environment. Interest rates rose from near zero to five percent in a matter of months, which had a ripple effect throughout the financial services industry.
Earlier this year, we witnessed the collapse of SVB, and the US Federal Reserve stepping in to provide stability to other troubled banks. Rich noted, “Banks, in particular, got caught up in that and we can talk about its impact on real estate and a lot of other asset classes. And the banks are not lending. In fact, the banks are going to have a whole host of portfolio problems, which could create second order buying opportunities for firms like us.”
Since the collapse of SVB, we have seen tighter credit conditions and concerns about contagions, especially in the real estate sector. After the global financial crisis (GFC), we experienced similar tight lending conditions, which have spurred the growth of the private credit market. Banks weren’t willing to lend, so private credit managers stepped in to fill the void.
Seasoned alternative managers, putting capital to work in today’s environment, may be able to negotiate favorable terms at attractive valuations. The bottom line is disruption often creates opportunities for those who are able seize the opportunity.
Make sure you don’t miss an episode by subscribing to Alternative Allocations on Apple, Spotify or wherever you get your podcast. Also, one article of interest is my previous private credit article: “Alts Angle: Disruption creates opportunities.”
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Alternative strategies may be exposed to potentially significant fluctuations in value.
Real estate investment trusts (REITs) are closely linked to the performance of the real estate markets. REITs are subject to illiquidity, credit and interest-rate risks, and risks associated with small- and mid-cap investments.
Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
Active management does not ensure gains or protect against market declines.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.