(Bloomberg) — The lines between asset classes are being blurred like never before as corporations search for new ways to raise cash. With public and private markets converging, says KKR & Co., a seismic shift is happening that will make 2025 credit’s “iPhone moment.”
“The launch of the iPhone wasn’t just the debut of a new product; it was the dawn of a new paradigm,” according to Christopher Sheldon, co-head of credit and markets at KKR and Tal Reback, director of credit and markets at the firm. “The global credit markets are undergoing their own transformation.”
Trading volume in the public debt market set an all-time high last year, while the proliferation of private credit is estimated by some to eventually reach $30 trillion. Asset managers, looking to capitalize on the frenzy, are creating bespoke portfolios bundling together anything from net asset value financing and collateralized loan obligations to leveraged bets and sale-leaseback deals. KKR — which oversees some $247 billion of credit assets — has multi-strategy funds that stand to benefit from the money pouring into the sector.
KKR views integrating “diverse asset classes,” as the “cornerstone of modern portfolio strategy.” That intermingling is driving the rise of cross-asset financing strategies, not just in debt but in equity markets too. “These solutions represent the ‘iPhone moment,’” the pair wrote in a investor letter viewed by Bloomberg.
“The old paradigm of siloed, fragmented products is giving way to a new era of diversified income solutions across multi-asset credit platforms,” they said.
Investors want strategies that blend public and private, instead of the more traditional method of separating asset classes into their own buckets with separate teams of portfolio managers, according to KKR.
KKR is not the only firm chasing the credit boom. Apollo Global Management Inc. has its own $5 billion multi-strategy credit fund with a 30-year maturity. All the cash flowing into new debt instruments has drawn some unwanted attention too, particularly in private markets where regulators worry the opacity on valuations is a growing risk for investors.
Looking to Asia
With US Treasury rates approaching 5%, KKR is turning to Asia-Pacific credit, which often offers higher yields and risk-adjusted returns relative to comparable credits in developed markets, according to the firm. Asian high-yield debt returned 16.4% to investors on an annualized basis, according to the letter, while in the US, the asset class returned 8.2%.
Sheldon and Reback note that default rates in APAC have been historically lower than those in other emerging markets. Regional markets like Singapore and Japan benefit from strong regulatory frameworks, enhancing transparency and investor protections, they wrote.
Japan, for example, is getting a boost from insurance, among other things. KKR says the country is undergoing a transformation fueled by corporate governance reforms, demographic shifts, and accommodative monetary policy.
“We suspect that Asia-Pacific (APAC) may leapfrog ahead of the United States,” they wrote. The region is set to integrate “diversified multi-asset solutions more quickly, capitalizing on opportunities to achieve relative value without taking on incremental risk.”