Churchill Asset's Ken Kencel's bull case for private credit amid the economic downturn

Private Credit as a Safe Haven Amidst Market Volatility

Key Concepts:

• Private Credit: Lending to non-publicly traded companies.
• Market Volatility: Rapid and unpredictable price movements in financial markets.
• Tariffs: Taxes imposed on imported or exported goods.
• Dry Powder: Available capital for investment.
• Spreads: The difference between the yield on a corporate bond and a comparable government bond.
• Covenants: Agreements or promises in a debt agreement.
• Leverage: The use of borrowed capital to increase the potential return of an investment.
• Non-accrual Rate: The percentage of loans in a portfolio that are not accruing interest.
• Bifurcation: Division into two branches or parts.

1. Market Downturn and Uncertainty:

• The market experienced a significant downturn, with the Dow down over 300 points and the Nasdaq down 2%.
• The S&P 500 closed below 5000 for the first time in a year and had its worst four-day loss since the 2008 financial crisis.
• This market volatility is attributed to uncertainty surrounding renegotiation over tariffs.
• Ken Kinzel suggests a "wait and see" approach due to the uncertainty in the markets.

2. Private Credit as a Stable Investment:

• Private credit is presented as a more stable and diversified investment class compared to traditional assets like gold, treasuries, and the dollar.
• Churchill Asset Management experienced a record quarter in Q1 2024, indicating continued strength in the private credit market.
• Private credit can fill the void when public markets go "offline," as seen during COVID-19.
• Private credit firms have significant dry powder to provide liquidity during market dislocations.

3. Advantages of Private Credit During Market Dislocation:

• Spreads tend to widen, covenants and structures become more favorable, and leverage tends to be lower in the private markets during periods of market dislocation.
• Private credit focuses on US-based companies, reducing exposure to non-US markets and tariffs. For example, Churchill Asset Management's portfolio has 85% US-based revenue.
• Private credit tends to focus on service businesses, which are more insulated from economic downturns and volatility.

4. Addressing Concerns About the Private Credit Market:

• There's been a flood of money into the private credit asset class, potentially leading to inexperienced investors and relaxed lending standards.
• Kinzel acknowledges the entry of new managers but highlights a bifurcation in the market.
• Larger, more scaled managers with significant dry powder, institutional investor bases, and relationships to drive deal flow are taking market share.
• These larger managers focus on higher-quality, market-leading businesses, resulting in low default and non-accrual rates. Churchill Asset Management's portfolio has less than one-tenth of 1% non-accruals.

5. COVID-19 as a Test for Private Credit:

• COVID-19 served as a test for private credit, and the market boomed to a larger degree after the pandemic.

6. Churchill Asset Management's Strategy:

• Focus on private equity-owned companies.
• Specialize in providing large-scale solutions (e.g., $400-$700 million).
• Maintain a portfolio of approximately 600 US companies.

7. Notable Quotes:

• "Private credit has always been a more stable and certainly diversified investment class." - Ken Kinzel
• "In periods of market dislocation, our markets tend to do very well." - Ken Kinzel

8. Synthesis/Conclusion:

Despite market volatility and concerns about the influx of capital into private credit, the asset class is presented as a relatively safe haven. Larger, more experienced managers with a focus on high-quality businesses and US-based revenue streams are well-positioned to navigate market uncertainty and provide liquidity. The private credit market has proven resilient, even during events like COVID-19, and continues to offer attractive opportunities for investors.