Secure income – Portfolio Insight


The more interesting question is the com- position of lending in the future, which Covid looks to have accelerated and a secure income asset fund will be able to take advantage of. Traditionally, banks have been a primary source of funding for all manner of bor- rowers, if not the primary source of fund- ing, but new institutional funders have entered the market. By utilising their greater than five-year money, pension funds and insurers can better match their liabilities with their income. That is much more reflective of the model employed by the US funding markets. We saw a real step change in borrowing behaviour following the global financial crisis where the willingness of banks to lend, particularly to the smaller to medi- um-sized entities, declined. This resulted in quite a sizeable increase in issuance across sectors that had only sporadically accessed institutional money in the past. For example, housing associations and higher education institutions.


In the aftermath of the 2008 crisis, there was also an increase in financing under- taken with modestly sized companies that would not have had access to the public markets before the crisis. That post global financial crisis period saw an increase in pension fund money stepping into bolster the available capital across sectors. This crisis has brought to the fore some of the underlying financial funding themes. The theoretical risks of a liquidity short- age have now been demonstrated in real practical terms with the economy, in vari- ous places, grinding to an abrupt halt. This is different to the global financial cri- sis and so the adage of using institutional markets, whether private or public, for the core, long-term debt funding and banks for liquidity purposes is at the fore- front of borrowers’ thoughts. The question is, how much of the expected focus on institutional investing is going to be a temporary or a structural shift? How much does this pandemic accelerate that movement again, just like the global


THE PANEL: Stuart Hitchcock,


head of portfolio management, private credit, LGIM


Amie Stow,


senior investment specialist, private credit, LGIM


Samuel Jones,


private credit portfolio manager, LGIM


financial crisis did? Does it mean another step-change?


There is a long-term move away from bank financing towards capital markets by UK and European companies. That is how the markets have evolved in the US. The global financial crisis and Covid will, we think, for different reasons, accelerate that shift. Crises also, of course, create market vola- tility which means borrowers increasingly favour the relative safety of private mar- kets to reduce execution risk. This increases the breadth and the range of


We have seen a range of pricing with some deals offering as much as 100 basis points above public bonds, which in the current environment demonstrates significant value.


Issue 96 | September 2020 | portfolio institutional | 25


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