then you have created a potential problem. Whereas, if you have a strategy which includes public and private markets with a longer-term return target then the manager is not incentivised to spend money poorly. Martin: There was an infrastructure debt product that I saw the details of last year that was charging just an asset under management monitoring fee and a fee for the deal. In that arrangement they are incentivised to do the deal and to deploy the money relatively quickly. Those arrangements are some- thing to be wary of. Wellesley: There are funds that are being sought by managers who have not even spent the previous funds. They are already gathering funds for the next one, so what incentives does that stimulate? Hamilton: The funds that they are raising the next time around tend to be bigger than the previous ones. So if returns are lower, performance fees are falling, the fee managers’ receive for investing capital in a €5bn (£4.4bn) fund compared to a €1bn (£884.7bn) fund more than compensates them for the reduction in the performance fee. Wellesley: If a manager underwrites poorly and makes bad loans their reputation can suffer but the asset management company will still pocket their fees and are not carrying any risk on their balance sheet, whereas, of course, the investors are. The banks that used to lend, where the people making the deci- sions were not carrying the risk created false incentives. Hamilton: We worry about smaller boutique managers being bought out by bigger firms, despite there being clear operational benefits. Typically, managers sell a small proportion of the business on day one with an option to buy-out fully in the near future. They are incentivised to grow revenues by launching new products because the pay day when they are bought out full is going to be much if short-term revenues have grown. Once they get that pay day, how are they then locked in and incentivised to stay?


PI: I have read that securitised vehicles are on the rise again. Is that true? Wellesley: They are becoming more popular. There is renewed interest because yields are picking up in some of those markets. Whether you are backed by car loans or mortgages, there are good managers out there and some reasonable opportunities. Hamilton: Again, especially at the senior end of the spectrum and probably investment grade, some of the returns you can get from structured credit are attractive and similar to what you can get in the illiquid space – with a lot more liquidity. If you are a pension scheme that does not have some of the issues investing in structured credit like insurers or banks do, then it should be considered too. Martin: In the past few years the use of collateral- ised loan obligations (CLOs) in credit products has been growing.


A few years ago, AAA or AA was sufficiently attractive to get you what you want but now the BB space seems to be the sweet spot for a number of managers. There’s nothing wrong with that, it’s just that you need to understand the product you are investing in. I have always been cynical about conflicts in equity CLOs when managers have manufactured them. Kwatra: We see a lot of these in the insurance space and we often say no because of regulation. When you mention the word ‘securitised’ to an insurer they would probably say that they are com- fortable with social housing loans with the underly- ing security or an equity release mortgage, that’s what we see as securitised. So it can be interpreted in different ways.


October 2019 portfolio institutional roundtable: Private debt 19


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