2022 has been a challenging environment for investors. High inflation, rising rates and economic uncertainties caused heavy losses in equities and fixed-income assets. The S&P 500 fell by 25% for example, and more surprisingly, many fixed-income benchmarks fell in tandem. As long as inflation stays above 3%, the positive correlation between stocks and bonds is likely to persist. Sharp rebounds and renewed sell-offs are likely, but uncertainties and volatility are likely to persist, even though inflation might have peaked.
Therefore, traditional 60/40 portfolios continue to offer very poor risk/reward characteristics. It is more important than ever that investors diversify their portfolios, incorporating alternative investments, such as commodities, hedge funds and certain areas within private debt into their portfolios.
Private debt has been in the spotlight, following the adoption of new regulations that curtailed banks’ ability to lend to small- and mid-size businesses. Among them, Basel III, the Dodd-Frank Act and the Volcker Rule, which strongly increased banks’ costs to conduct lending activities, pushing them to limit their scope to larger businesses, leaving the small and mid-size segments completely unserved.
This has created compelling investment opportunities for private debt fund managers who are not subject to the above-mentioned regulations and can turn around loan applications much quicker than traditional banks thanks to their non-bureaucratic style.
Private debt investing refers to any type of lending made by non-bank investors. The universe is wide and consists of various sub-strategies such as direct lending, bridge lending, factoring, consumer finance, equipment leasing, and distressed/special situations, amongst others, which all come with different risk/return/liquidity profiles. Over the past years, private debt investments have demonstrated low correlations with traditional markets, which is very helpful in achieving optimal portfolio diversification. This allows investors to both, increase returns while reducing risk at the same time.
Investors should focus on areas within private debt that combine high yields, strong protection and short durations, which is the best combination for high inflation and low growth environment, with potentially ongoing interest rate increases. These characteristics can be found in certain niches within the senior-secured direct lending area. Short-term loans with relatively low ticket sizes are often the most overlooked areas, where banks are not providing funding at all. The scarcity of capital means that investors can get high single-digit or even double-digit returns with very low risk. Default rates are typically very low, and recovery rates are very high, which means that it is very rare to see any drawdowns in diversified, well-managed loan portfolios.
Alternative investments remained for long an asset class reserved for a certain elite with deep pockets. However, this is no longer the case, as today several private debt fund managers are offering access to a larger public via investment funds, that maybe be open-ended or closed-ended. Open-ended funds have the advantage that they offer liquidity to investors, similar to traditional fixed-income products.
Among them, Katch Investment Group. Katch is an innovative private debt asset manager domiciled in the United Kingdom, with an AuM in excess of $500M and currently managing 6 funds. Katch’s investment strategies focus on the so-called sweet spot for private investors, which is characterized by short-term duration, strong collaterals and high returns. Investors can now enjoy access to a diversified private debt portfolio thanks to Katch’s flagship fund, the Katch Global Lending Opportunities fund, which provides exposure to collateralized high-yielding strategies such as direct lending, bridge lending and factoring, meanwhile keeping a high level of liquidity allowing investors to enter and exit on a monthly basis.
Disclaimer: The Katch Funds are solely reserved to professional and qualified investors as per MiFid II. Past performance should not in any circumstances be taken as an indication of future performance. The value of the money invested in the fund can increase or decrease, as a result of currency fluctuation and there is no guarantee that all of your invested capital can be redeemed. Investors and prospective investors should refer to the official documents of the Fund, including the Private Placement Memorandum, for further information about the risk of investing in this investment fund.