6 days ago
More private credit partnerships likely between GCC sovereigns and asset managers
Asset managers are still assessing the impact of the US trade tariff announcements on private credit, but more partnerships between sovereigns and asset managers in the GCC are likely in the asset class.
While equities were gripped by volatility in response to the wide-ranging tariffs in April, the impact on credit was different, particularly as the US administration delayed proposed charges in response to a US Treasury selloff.
Richard Miller, Group MD and CIO of US-based asset manager TCW, which opened a DIFC office last year, described the tariffs as 'not helpful' and said, 'Economic activity one thing it cannot take is uncertainty, and [the tariffs have] caused a great deal of uncertainty.'
Despite the US administration pausing its 145% tariff on China, the uncertainty surrounding it has not gone away, yet this may boost private credit, as senior secured lending is often viewed as a safe harbour.
'It's a time of volatility, and you want to be in safer investments, less risky investments, more senior in the cap stack,' Miller said. 'But I don't know that it's just 'close your eyes and go to private credit'. Manager selection always matters.'
Enter Abu Dhabi sovereign Mubadala, which recently announced a $1-billion deployment of private credit and asset-based lending with US firm Fortress, in which it owns a stake as of 2024.
Wael Younan, TCW's Middle East co-head of sovereign wealth management based in the DIFC, said there are increased discussions with sovereign wealth funds on allocations to private credit. He added that there are now more private credit teams and allocations which is a strategic long-term focus.
'Liquidity is going to be needed; it's about what they can do with the existing public market pool, as they're building on their private allocation, and how much yield can they get on the public side,' he said.
'That is that balance that you're going to see more and more of these sovereign wealth funds seeking,' he said. More partnerships between sovereign wealth funds and asset managers are likely, he added.
Moody's recently downgraded the USA's last perfect credit rating from AAA to Aa1. Its recent report on emerging market exporters said the MENA's direct exposure to US tariffs is limited by most of its exports not being subject to tariffs. But oil and gas and petrochemical companies would be hurt by slowing global economic activity and lower oil prices.
Sustained depressed hydrocarbon prices would lead to lower government spending, which could slow domestic economies. A significant global slowdown could weaken demand for real estate in the GCC, particularly in the UAE.
Growth for the MENA banking sector will become more difficult if economic activity slows and lending margins compress, Moody's said.
Dan Farley, CIO, Investment Solutions Group, State Street Global Advisors (SSGA), said recent events had parallels to President Trump's first term, including a tendency to go back and forth on negotiations, although fundamentals played themselves out.
SSGA saw the initial tariff announcement as a starting point rather than the end point, a forecast which is, so far, proving correct.
'What we're not saying is 'ignore it', nor are we saying 'don't worry about the long term'. Where we have discretion to manage asset allocation, we have reduced the risk in portfolios, we have gone underweight to equities, relevant to our benchmark, and put some more money in fixed income as a good diversifier. We continue to be overweight on gold,' Farley said.
Private credit has allowed investors to pick up incremental returns in their portfolio at somewhat similar risk levels to public investment. While they are not exactly the same in publics and privates, in many cases they are somewhat similar, Farley said.
There may be concerns about the short-term impact of a potential economic slowdown and its impact on creditworthiness. But as a strategic asset, he said, private credit is here to stay.
(Reporting by Imogen Lillywhite; editing by Seban Scaria)
