The credit cycle seems to be turning. Goldman Sachs is advising clients that a rate cut could arrive as early as February next year, kiboshing the now well-known slogan “Stay Alive Till 25”. Yet some still have concerns about the potential impact of rate cuts on credit markets, especially if it is driven by a looming recession. How should we be assessing the situation and what will it mean for the talent acquisition landscape going into next year?
CEOs in the private debt space closely monitor evolving economic conditions while trying to navigate any potential challenges that lie ahead. While it is never ideal to face a recession, we must remember that rate cuts are often implemented as a measure to stimulate economic growth and provide relief to businesses and consumers. But in the context of credit markets, rate cuts can have both positive and negative effects. On the positive side, lower interest rates generally make borrowing cheaper, which may encourage businesses to invest and expand. This increased demand for credit can potentially benefit lenders and debt funds, particularly in light of the retreating mainstream banks.
However, we also need to acknowledge the potential risks that come with a recessionary environment. During times of economic downturn, credit markets can experience increased volatility and heightened risk aversion. Lenders have already become more cautious in extending credit, which has led to a tightening of lending standards.
More of this could make it more challenging for businesses and individuals to access credit, which could have broader implications for economic activity. We see an ever-growing need across all fractions of the private debt space to bring on experienced Risk candidates to help navigate these uncertain times and help mitigate the possibility of distress ahead.
CEOs should remain balanced in their approach; while being mindful of the potential risks, there are of course opportunities that may present as a result of being proactive and adapting strategies to navigate the changing landscape. This may involve conducting thorough credit assessments, closely monitoring the financial health of borrowers, and diversifying lending portfolios or launching new strategies which are able to withstand turbulence ahead. Rate cuts won’t necessarily arrive in time to present further stress/distress. Inflation concerns are still very real and some clients we have recently spoke to speak of central banks erring on the side of inflation management; floating rate exposures and new refinancings may continue to see elevated costs.
In addition to risk, we see an increasing need for experienced Relationship Managers and Originators. Nowadays, more and more is expected of them: not just closing transactions but a highly skilled and finessed ability to form bonds in difficult markets using unorthodox and creative ways of structuring complex deals to make it work for clients. This often involves very strong underwriting, risk or execution skills or a combination of all three. Those at the top of their game are extremely in demand, and even the most seasoned headhunter, such as myself, finds a huge skill gap in talent. Of course, quality always trumps over quantity as those that have worked with recruiters contingently can testify.
Ultimately, even if rate cuts do go ahead early next year, there is a consensus in the real estate debt sector that there will still be pain ahead. There is a growing sense of unease in the real estate sector as a flurry of advisory firms, lenders, and debt funds have already started making redundancies, with others prolonging their hiring freezes into next year. The effect of this has been many quality and often high profile candidates who thought their jobs were safe, now actively look or consider moving. Several years ago, these moves would have been unheard of. But those being made redundant in the debt space find new jobs relatively quickly compared to the GFC which shows the robust nature of where we are now. Indeed, we just completed a search for a Head of Origination and 2 out of 5 candidates on the shortlist had pending offers from several other competing firms.
Conversely, I am working with numerous private debt funds outside of real estate that need to engage a professional headhunter for team build-outs and senior-level hires. These clients show no signs of slowing down given the increased investor appetite for private debt and we expect this growth to continue well into next year and beyond. The past decade has seen a global search for yield with investors increasing their allocations to private and alternative credit. Data from Preqin forecasts that AUM in private debt are set to reach $2.3 trillion by 2027. Fidelity International, as an example, saw private companies committing around 23% of EBITDA to debt servicing in 2021 while this year saw that figure rise to 36%.
The ability to navigate through potential rate cuts and a recession rely on the ability to adapt swiftly, remain vigilant, and make well-informed decisions. By proactively managing risks and leveraging opportunities, companies can position themselves as a resilient and reliable player in the credit markets.
Hunter Scott Executive Search is committed to focus on supporting our clients during challenging times. By developing strong relationships, understanding needs, and providing tailored solutions and continuing to be a trusted advisor, we can help clients weather the storm and emerge stronger on the other side. Wishing you and all your loved ones Happy Holidays and a safe and prosperous 2024!