Goldman Sachs Unit Sees a Lot to Like About Private Credit

(Bloomberg) -- Jon Yoder, co-head of credit alternatives at Goldman Sachs Asset Management, sees increased access to company information as one of the most appealing parts of private credit.

Yoder, who helps oversee $12 billion of total capital in credit, spoke with Kelsey Butler on Nov. 19. Comments have been edited and condensed.

Where do you see opportunities in private credit?

We look for areas that have very nice growth tailwinds behind them -- industries, sectors and trends. One is enterprise software. Entities of all types are adopting software solutions to improve their efficiency. The combination of growth tailwinds, sticky customer relationships and high free-cash flow means it’s a very good place for leveraged lending.

Another area we like are certain parts of health care, namely services, where you have high free-cash flow margins and customer bases are sticky. Health care benefits from the strong macro tailwind of an aging population in the U.S.

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And with the globalization of the world economy, online shopping and other things that are bringing the world closer together, there is a tremendous need for different types of logistics companies. A strong vein of opportunity for us is in logistics and transportation.

How will private debt continue to grow?

In my mind, there are three things that determine whether we as private credit investors are truly delivering value to our investors. Number one, is the spread. There is still probably about a 150 basis points of extra spread from going into private credit relative to a comparable public credit.

The second thing is you should get a better structured deal or better terms in private credit. A lot has been written about how the broadly syndicated market is largely covenant-lite -- that contrasts with the 90% of the deals that we do that have financial maintenance covenants.

The third thing, and the least talked about but which to us is very important, is the access to due diligence. In public credit, there’s very limited access to due diligence -- typically an offering memorandum, maybe a short management presentation and that’s pretty much it. Compare that to private credit, where you have direct access to the company, its executives, the private equity firm that owns the company and third-party analysis.

How do you deliver returns in a low-rate environment?

A lot of clients of all stripes are telling us that they’re struggling in this low-interest-rate environment, and so we started looking around to find ways to deliver high-yield types of return without taking on more credit risk. One area we think is very attractive is renewable energy.

An investment-grade rated entity such as a corporation, utility, municipal entity or higher education will enter a long-term contract to buy renewable power from a firm. That long-term contract can generate a cash flow stream very similar to that of a long-dated amortizing bond. But the beauty of it is that you can generate a high-yield sort of return while taking on investment-grade credit risk.

To contact the reporter on this story: Kelsey Butler in New York at kbutler55@bloomberg.net

To contact the editors responsible for this story: Natalie Harrison at nharrison73@bloomberg.net, Dan Wilchins

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