Specialty finance investing can effectively complement a broad private credit allocation. It enhances portfolio diversification while preserving capital and offers to create stability through a variety of underlying asset types and potential return targets.
We expect liquid credit returns to decline due to low credit spreads and anticipated Fed easing. Direct lending returns should moderate but continue to outperform their liquid counterparts. Meanwhile, insurance-linked securities will continue to benefit from strong demand, and increased transaction volumes should support both specialty finance and credit opportunities managers. In emerging markets, currencies should become a tailwind for local bonds.
We believe insurance-linked securities can be a good fit for many pension funds looking to diversify their portfolios. This paper shares insights on how pensions can confidently underwrite and implement this asset class.
We expect most liquid credits will generate higher returns in 2023 relative to 2022, given the better yields on offer. We also see private credit as offering opportunities, particularly in secondary trading.