Scott Kapnick, founder and CEO of HPS Investment Partners, discusses the current economic outlook and his strategy for identifying opportunities to deploy private debt capital amid a challenging environment of inflationary pressures, rising interest rates, and recession fears.
On finding opportunities during a global realignment: “If you want to call it deglobalization, it's now a headwind to growth. But Germany -- I was talking to some people last week -- they are going to realign. They're going to figure out how to move their manufacturing to low-cost energy. They're going to figure out how to adjust their system. It won't be a year. It might be a couple of years. But they will do that. And that realignment creates huge opportunities for the firm as people do that, because it takes capital. And big opportunities for firms like ours to provide the capital to allow them to do that.”
On the repercussions of building supply chain resilience: “The big issue with deglobalization is the focus now on resiliency of supply chain. So, we're a lender. We want to focus on how people are doing that and what's that mean. That means usually increased costs, duplication. So, that means they're going to make less money. And they're going to have more capital into that, which is going to be huge for financial markets.”
On the unique factors shaping the current economic environment: “The other thing that we have here that we have not experienced is quantitative tightening. So, you've got rising rates. Federal Reserve quantitative tightening. On top of a lot of the COVID-- we still have a pandemic. We have a war in Europe. So, we have a lot of uncertainty to resolve. And then we still have China locked down. So, how those factors play out are completely uncertain. We're credit underwriters. So, we're more focused on downside. And we want to make sure that whatever we're lending to can weather through a recession and shrinking profit margins.”
On the future of private credit: “If you look at what's happened, private credit has grown immensely … since '08. It's grown from several hundred million to a trillion-and-a-half-dollar market, growing at 15 percent for the foreseeable future. So, it's going to double or triple. And the reason for that is that borrowers want certainty. They don't necessarily want a syndicated loan. The syndicated loan markets continue to grow, but at a much slower rate.”
This episode was recorded on September 22, 2022