together gives you a more reliable curve, but we certainly would keep a significant portion in liquid public markets as well. Kwatra: A lot of what we have said about opportunity, cost and ensuring an illiquidity premium is almost advocating that you should not rush into private debt. A slow steady build-up is optimal.
PI: How does ESG fit into private debt? Martin: The environment in which we are investing is changing in terms of what’s acceptable. The mining companies you may have lent money to three or four years ago now have carbon footprints to consider. You have to understand the changing environment, such as climate change risk, and what you will have to go through in terms of stress testing. Wellesley: When the lenders were lending to Yellow Pages it seemed like one of the safest loans one could make, but the environment changed. If you look retrospectively at climate aware funds or ESG funds, they have not performed particularly well and have been expensive to run. That doesn’t mean going forward we are not going to change rapidly. If public sentiment is changing at the pace that it is, a lot of these things that are back-tested are going to have no relevance in the forward-looking market in terms of whether certain business strategies become obsolete faster than expected. A whole new level of awareness is required. Martin: You cannot anticipate everything, so having the mindset to at least think wider is important. Kwatra: It’s going back to what assets are going to work in 10 or 20 years’ time. Atkin: The longer your investment horizon, the less reliable your credit rating process can be, so you rely more on the security of real assets or some form of governmental guarantee to provide you with comfort. Martin: Five or 10 years ago, when supermarkets and hypermarkets such as Tesco and Sainsbury’s were in favour, property income products where quasi-supermarket funds. Shopping habits have changed and those hypermarkets are not as in favour now.
In 2013 and 2014 a lot of money was lent to people buying shopping centres in the UK. I imagine those people are having an interesting time at this point given the property cycle.
October 2019 portfolio institutional roundtable: Private debt 15
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