The credit markets have been volatile in 2022 and this turbulence has driven three major shifts in how credit managers use investment research. These changes mark a step change in workflow and will accelerate the disruption of conventional research models.
Arguably the biggest change is the emphasis managers are now putting on understanding the entire value chain of potential investment targets.
In today’s market, managers have a higher bar for approving new deals. Lenders are more cautious and want to fully understand all of the risks attached to each investment opportunity. In the past, calibrating risk exposure primarily meant knowing how a company operates from operational KPIs to cash flow generation but in the current market environment, where a supply chain bottleneck in Shenzhen can halt production lines in Sheffield and San Francisco, watertight due diligence increasingly means holistic due diligence – and so credit investors want to see a more complete picture to understand the real risks.
In practice, credit managers are looking at chains of suppliers, customers and competitors so they are better able to isolate risk exposure. The research usage patterns we’re seeing suggest that investment managers who are looking at companies in isolation could be missing material risks.
That said, examining multiple companies in tandem can be time-consuming, so credit managers are seeking new ways to explore value chains. The big challenge here can often be charting them in the first place, especially when access to such information is typically fragmented, unqualified, and often outdated. Additionally, disclosure can vary materially from company to company and two firms in the same industry may evaluate their competitive set very differently. We are currently testing on-demand value chain ‘maps’ as a way to plot and easily visualise these multiple company relationships and we see such visualisation as the next big evolution in investor research.
Increased competition means credit managers are seeking to accelerate the development of their early investment theses.
Competition in the credit world is intense and opportunities need to be assessed efficiently. This makes the speed of deploying capital an important dimension and one that rewards those who conduct thorough due diligence quickly.
This is prompting credit managers to utilise research providers that allow them to go faster, enter new markets more effectively, and be more flexible. When managers are faced with a deluge of information and data, knowing how to focus on what matters, and move forward with clarity, is crucial. Sell-side notes, investor presentations and credit news providers can all play a role here, but immediate access to interview transcripts with industry executives is increasingly popular.
Simultaneously, increased scrutiny is forcing credit managers to go deeper and stress-test more contrarian viewpoints
Reflecting the multi-layered risks present in today’s marketplace, credit managers are facing tougher and more probing questions from their investors. Of course, managers already have a wealth of information from their own sources, the sell-side, and various rating agencies. However, to really get a thorough understanding of a business and its industry requires in-depth conversations with people directly familiar with the company.
This helps to explain the momentum and increased reliance on human insights in the credit investment research process, especially during an age where AI was meant to gain more traction. Ultimately, managers want reliable ways to surface issues that are overlooked by conventional research and whether that comes from AI or not is irrelevant. What matters is whether you know if a toxic culture has infected a company’s leadership team or if there is a major shock coming with customer advocacy turning negative. AI can’t reliably reveal this, yet.
Consequently, credit managers are using one-to-one expert consultations to stress test what their other research sources are telling them. Consultations give credit investors the opportunity to pose highly tailored, specific questions about a prospective investment target. With the expert network market currently sized at around $2bn and growing 15-20% per year, the direction of travel has been clear for some time.
Due to a multitude of factors including inflation, a rising interest rate environment, supply chain issues, and military conflict in continental Europe, the next few months are hard to predict. What we do think is that the turbulence that markets are experiencing today is fundamentally reshaping the research needs of the world’s leading credit managers. The market for investor research now needs to catch up.
Joshua Maxey is Co-Founder of Third Bridge
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