TCW CEO Koch Warns ‘Major Accidents’ Ahead in Private Credit

(Bloomberg) — TCW Group President and Chief Executive Officer Katie Koch said cracks are starting to show in the private credit market and that investors should prepare for “major accidents” in the red-hot sector over the next 12 to 18 months.

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Koch said in an interview at the Milken Institute Global Conference in Beverly Hills on Monday that she still thinks the asset class is “one of the great investment opportunities” over the next decade, but only if investors approach it “in the right, conservative way.”

Koch, whose firm manages roughly $215 billion, said most private credit firms were started after the global financial crisis, in an environment of low to zero interest rates. “That’s a very easy backdrop to operate against,” she said.

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Koch said investors should make sure their private credit managers are in a covenant-heavy portfolio. “When things go sideways covenants give you an ability to be at the table,” she said.

Strong due diligence is also critical, she said.

“We have had five years where ‘diligent light’ became a term,” Koch said. “That is not going to be fun over the next five years if you arrived at it from that perspective.”

Koch also pointed to “some correlation” in private credit and private equity assets, meaning investors need to make sure their private credit managers are good at origination “and not just dependent on these large private equity sponsors.”

Private credit popped up frequently in discussions at Milken on Monday, with Goldman Sachs Asset and Wealth Management Chief Investment Officer Julian Salisbury saying that a wider group of investors are beginning to see opportunity in the sector.

“There’s tremendous interest and demand,” he said in an interview with Bloomberg Television. “The nominal rates of return on private credit are getting up to a point where people are increasingly interested in making it part of their strategic asset allocation.”

Elsewhere in the economy, Koch said investors should be “very underweight” regional banks. She spoke hours after US regulators seized First Republic, which JPMorgan Chase & Co. agreed to acquire.

“The globally systemically important banks are a good place to be invested,” Koch said. “Regional banks is an area we are concerned about because of deposit flight, and also they have the highest exposure to commercial real estate, which is an area we are concerned about.”

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–With assistance from Sonali Basak.

(Updates with additional comments on private credit and regional banks starting in the eighth paragraph.)