Pimco to boost hiring for push into private credit

Pacific Investment Management Co. has a decent record of betting on distress. Almost a decade ago, the firm managed to cope with the chaotic departure of its founder Bill Gross because of the fortune it made from snapping up cheap mortgage debt after the financial crisis.

Now, as the bond behemoth manages another awkward moment — confronted by choppy fund flows and returns — it wants to repeat the trick. This time it wants to take advantage of finance’s latest craze: private credit.

In an interview with Bloomberg News, the man in charge of Pimco’s $162 billion alternative-investment business says he’s been stepping up hiring this year as the firm beefs up its private-lending team to seize opportunities in a credit market that’s braced for carnage from stubbornly high interest rates.

“As long as rates remain elevated from where deals were underwritten there’s going to be an increasing strain for some of these borrowers and structures,” says Jamie Weinstein. “The pot is on the stove and the flame is on.”

The comments reinforce those of Oliver Baete, chief executive officer of Pimco owner Allianz SE, who told Bloomberg last month of plans to push deeper into alternative assets such as property and private credit.

“We’ve added resources and headcount in the last six months to the alternatives business overall,” Weinstein says, “And particularly within corporate direct lending and asset-based lending, where we’re slowly scaling up our private strategies businesses.” The pullback in bank lending, which accelerated in 2023 after the collapse of Silicon Valley Bank and Silvergate Capital Corp., is creating “meaningful opportunities,” he adds.

Pimco joins a throng of asset managers flocking to private credit, drawn to higher fees and returns that can run from high single digits to the mid teens for riskier deals. The market has roughly tripled in size since 2015 to $1.5 trillion. Pimco already invests more than $210 billion in private markets.

Things could turn ugly soon, however. Private-credit funds arrange loans on a floating-rate basis, and interest-rate pressure could see some balance sheets buckle. The terms of most private-credit deals outstanding today would have been agreed at least 18 months ago when rates were close to zero. Even Pimco’s chief investment officer, Dan Ivascyn, has warned investors to “stay away” until the market reprices.

Nevertheless, much like Gross and Ivascyn when they took their lucrative punt on mortgage-backed securities more than a decade ago, Weinstein and other Pimco leaders are busy positioning themselves to profit from any meltdown in private lending, real estate or other alternative assets.

Pimco CEO Manny Roman has been talking up recession opportunities since 2018, and Ivascyn is predicting a harder economic landing than most. The firm wants to be an aggressive, deep-pocketed competitor when bargains come up. “It’s about pulling the trigger at the right time when the risk is wrung out,” says Eric Jacobson, a fixed-income director at Morningstar Research Services LLC. “And they’re still waiting for that to play out.”

Weinstein — who before joining Pimco in 2019 spent 14 years at KKR & Co., including running special situations investing — has been specifically fortifying his teams to manage stressed and distressed corporate assets.

“Pimco needs to find assets which need active fund management and offer higher margins,” says Charles Graham, senior analyst at Bloomberg Intelligence. “That’s the attraction of building a private-credit platform.”

Working Out

The firm will lean on its huge client base to tap all areas of this once niche market, including straightforward direct loans to private equity companies, corporates and real-estate firms as banks and capital markets back away from the scene. But the riskier funding of assets in trouble will be crucial. Pimco has assembled a cohort of restructuring experts to try to get an edge over less well-resourced rivals.

Many direct lenders who set up a business making loans on corporate buyouts “haven’t built teams that include workout people for if these things go wrong,” Weinstein says. “We’ve been built for it the whole time.”

As Pimco doubles down on alternatives, it’s been actively hiring “operational specialists” to manage the distressed debt of companies it has stakes in — evidence of how it plans to assert control when businesses are struggling. “It goes far beyond a workout strategy in a distressed position,” Weinstein adds. “It’s where we’re directly involved in a company. We’ve built that muscle for Pimco in the last year.”

Rivals can already attest to Pimco’s assertiveness in stressed situations, including its involvement in so-called “creditor-on-creditor violence.” Last year it threw a financial lifeline to a struggling aerospace supplier, but in the process pushed other creditors down the pecking order for repayment.

Separately, Pimco is trying to capitalize on depressed prices in bond and loan markets. Last year it bought billions of euros of buyout debt that banks couldn’t sell, adding them to its flagship $124 billion bond fund. Scooping up this “hung debt” is a trade usually associated with hedge funds and private equity firms taking heftier risks. In recent months Pimco has kept buying.

It has also backstopped deals to businesses that need cash to survive, including those where Pimco’s already on the hook. It was part of a group of funds that provided extra financing to Adler Group SA to give the beleaguered German landlord time to sell assets and repay creditors.

Bigger Picture

Pimco’s alternatives push is backed by the numbers. Bloomberg Intelligence estimates the unit generated about a fifth of group revenue in 2022 even though it only makes up about 5% of investments at what’s still overwhelmingly a bond firm with $1.8 trillion of assets under management.

The broader business has been through a torrid time after a long bull market for bonds ended abruptly, although things have improved lately. A €75 billion streak of outflows ended last quarter as the asset manager drew €14 billion of new money. Its biggest bond fund — the flagship Pimco Income Fund — has returned 3.6% this year in the institutional share class, beating 92% of its peers, according to data compiled by Bloomberg.

Pimco’s bosses hope the recent gains stick. The return potential in bonds is the best it’s been in 14 years, they said in a Bloomberg TV interview last month. Ivascyn has been touting safer assets such as agency mortgage-backed securities, which have a government guarantee. He’s also pitched short-term publicly traded bonds that provide equity-like returns, drawing a wry response from Gross who’d made the same call a few weeks prior.

While Ivascyn sticks to traditional strategies, Weinstein is in the thick of the hunt for distressed wagers.

Morningstar’s Jacobson sees the parallels between Pimco’s big crisis-era mortgage bet and Weinstein’s prep work this year: “Ivascyn stepped in when the assets were ultra-cheap and capitalized on wider fear still plaguing the market. It could be a similar game they play this time around with their alternatives business.”

As the alternatives arm seeks ways to bolster the firm’s profit margins, it’s also touting private lending to commercial and residential real-estate firms, as well as mortgage-backed securities. Pimco’s looking at private mortgage pools in the US and some European markets. It foresees a tsunami of property loans maturing through 2025, including at least $1.5 trillion in the U.S., about €650 billion in Europe and $177 billion in Asia-Pacific.

“It’s pretty hot on that stove right now,” Weinstein concludes.

--With assistance from Tasos Vossos.