complexity, lack of transparency, execution risk or regulatory risk; it just happens to be illiquid. If there is no good liquid proxy then it is difficult to observe what premium there is for illiquidity. It is important to be aware of what you are buying and understand when we say ‘risk-adjusted return’ what the risks are. Halfon: Illiquidity is not having ongoing pricing on an established market, but if you look at the way par- ticipants in the SME lending market are playing it’s very transparent. It’s a bottom-up approach where you have introducers, auditors, accounting firms and lawyers who deal with those companies on a daily basis and realise they need some financing and make it transparent for lenders to come in and do this in a completely transparent way but it’s not traded, you cannot transact on it every day. The fact that you don’t have a benchmark is a good point. If it is difficult to find one it doesn’t mean that it’s not transparent, it just means that it arrives to the market in a different way than traditional securities. Greaves: Illiquidity is multi-dimensional. We have talked about some assets that throw off high running yields. A lifetime mortgage book pays 7%, 8%, for example, when you include principal repayment. That is pretty liquid because you are unlikely to need more than that until a scheme is very mature. It is just if you have significant shifts in your strategy or you want to buyout then there could be problems. So it’s important to slice and dice what you mean by illiquidity. It’s not just the ability to realise the entire value within a week or so. Payne: It’s a desirable asset but it might take six months to get out into market. Yes, that’s illiquid but it’s different from something which won’t at some point be marketable. It’s a different thing. Ghosh: What we saw as outsize returns when we first started investing are being compressed and have gone to more reasonable value or just below fair value for the risks involved. That said, a lot of pension schemes are referencing the assets that they have purchased versus a gilt discount rate. We frame it as are we happy to take out leverage to buy gilts at negative real yields of 1.7% and stomach this type of long-dated asset where you are not buying it as expensively as you would a gilt.


PI: So origination is important when looking for someone to manage a portfolio of cash-flow generating assets? Halfon: It is more complicated than the traditional sourcing of assets. The process to access SME loans, for example, requires a large infrastructure, partners, introducers, a network of people work- ing with you. To do this efficiently in Europe you probably need 200 to 300 people. This is only for one asset class. In mid-market US loans, we have had an entire investment banking division work- ing on this for three decades. So this is not as straightforward to source the right assets as a lot of other asset classes. Exley: A lot of value is added in the origination and then after that it is looking after the asset and making sure that it continues to perform. The origination platform needs to be well resourced to actually find the assets and the fees charged need to reflect this. Ghosh: There is a scarcity of these assets, espe- cially at the price we want to pay. We stay close to the asset managers to make sure we are at the top of their list when their queue for long- lease properties goes to zero. We are doing a lot of relationship networking to stay close to them for when a new supply of cash-flow-generating assets comes to market.


Chetan Ghosh


16 March 2019 portfolio institutional roundtable: CDI


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