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infrastructure. Then you get into the trap of illiquid asset classes not being valued relative to each other and you don’t have a cohesive asset allocation anymore. Martin: It takes months to get deals signed, so if a liquid equivalent becomes much cheaper and the spread widens, you need to be able to think slightly wider. If you can get 300 basis points from an asset that is liquid, why would you lock yourself into something that’s illiquid? In the more volatile markets that we are probably entering, there will be pockets of opportunity in the liquid space which we should not ignore. What you tend to find is that private debt managers do not think like that because they are committed to the deal. As the asset owner, you have to be smarter and partner with someone who will look at illiquid opportunities as and when they arise. Kwatra: That is what I would label a “risk”. We have talked about downgrade risk and monitoring, but the opportunity cost is another risk. You cannot pile all your assets into private debt because you could lose the opportunity to exploit these market dislocations. Atkin: The way we manage our portfolios and encourage our clients to align themselves with us usually starts with a liquid public market proxy. We only commit money to the private side once we know all the terms and are convinced that there is a pick-up in seniority security or spread. Halfon: We try to get the best deals in illiquid, if we cannot we replicate using liquid assets. We monitor the illiquidity premium before deciding to invest or not. If we do not get the proper premium, which is rewarding you for the illiquidity risk of your loans, which may take a significant loss if you decide to sell before redemption, you should not be in that market. At the same time, thanks to our cash-flow manage- ment layer, we constantly monitor the illiquidity premium. Martin: You talk about cash-flow management, but there is spurious accuracy in any projection by an actuary. You should also not lock too much capital into illiquid assets because things like transfer values happen. There is a balance to be struck. Atkin: If you look at the markets, it tends to be that the shorter end of the curve, sub-15 years, is where you get most of the public debt being issued. Once you drop off into the longer parts of the public debt markets you are stuck with some quite idiosyncratic risks. The ability to blend the public and the private


14 October 2019 portfolio institutional roundtable: Private debt


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