The credit rotation

BNP Paribas’ 2022 Credit Trends Survey shows investors think the time is now for distressed credit.

In discussions with allocators who are looking to explore opportunities in credit, supported by the results of the 2022 Alternative Investment Survey published earlier this year, BNP Paribas’ Capital Introduction team noted a shift in investor preferences has started to emerge. The ongoing rising rate regime and deteriorating global economy has created further opportunities in distressed credit.

In the 2022 Credit Trends Survey titled ‘The Credit Rotation’, the Capital Introduction team surveyed 90 allocators globally that collectively invest or advise on US$380bn in hedge fund assets, with 52% of them based in the Americas, 43% in EMEA and 5% in APAC. The participants included intermediaries (fund of funds, investment consultants and outsourced CIOs), private investors (private banks, wealth managers and family offices) and institutional investors (private pension plans, endowments & foundations and trust banks).

Conducted over the course of the last two months, the survey provides insight to better understand investor sentiment on credit and asset allocation plans for various types of credit strategies across the liquidity spectrum. Key findings include:

Distressed credit: the time is now

  • The biggest increase is expected to happen in less liquid credit, with 50% of investors intending to increase allocations to distressed credit in 2023, a 28% increase from 2022
  • Twenty-three percent are increasing allocations to event-driven strategy in 2023, a 10% increase from 2022
  • Allocations to private credit are flattening with a 3% decline from 2021
  • Moderately liquid strategies such as credit long/short and relative value remain a focus for investors albeit  with smaller expected year-on-year increases

The credit rotation

  • Twenty-four percent of investors who have redeemed from one type of credit strategy over the last 12 months have reallocated to another type of credit strategy
  • The three main sources of capital that has been added to credit strategies come from cash (33%), equity (30%) and 24% from credit due to reallocation between strategy types
  • The remaining capital added to credit has been sourced from small reallocations from macro (5%), multi-strategy (5%) and quant (3%)
  • Capital has remained ‘stickiest’ (investors look to maintain their allocations) in strategies including credit relative value (51%), structured credit (47%), convertible arbitrage (45%) and event-driven (47%)

Regional net demand for the US and Europe strengthens

  • Investors are planning to increase allocations to all credit regions in 2023, with the greatest increase in US credit (+35% on a net basis)
  • European credit will see the greatest increase year-on-year, with 29% investors planning an increase in 2023 vs. 10% in 2022
  • Over 2023, investors expect to increase allocations to APAC and emerging markets credit, having reduced exposure on a net basis in 2022

Whilst many allocators expect that significant weaknesses could persist in global markets, they are responding tactically by allocating risk to credit strategies that exhibit low correlation to markets or to specific opportunities created by the current environment. As a consequence distressed, special situations, private, and to a lesser extent, structured credit, are areas expected to benefit. Additionally, managers feel that high quality corporates with strong balance sheets, i.e. investment grade credit, could outperform stocks in weaker growth markets.

Marlin Naidoo, Global Head of Capital Introduction at BNP Paribas

BNP Paribas is a key partner for fund managers looking at increasing opportunities in distressed and event-driven credit given our fully integrated cross asset Prime platform, allowing cross margining, wide access to short credit and comprehensive reporting with market colour.

Ashley Wilson, Head of Prime Services at BNP Paribas

To access the full survey, please contact the BNP Paribas Capital Introduction team.

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