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Bringing private credit to a wider audience
Julien Halfon, head of pension solutions at BNP Paribas Asset Management
In many aspects of life, the term “private” often refers to something exclusive, in short supply and only destined for those in the know. When applied to assets, however, it means quite the opposite.
Far from being thin on the ground, private assets outnumber their publicly listed cousins several times over. This means the range available to investors is also much broader, offering greater diversification to a portfolio and allow- ing closer tailoring to their exact needs. However, there is one aspect that still rings true: investors need someone in the know to help locate them.
The real economy
While public markets illustrate the story of a country or region’s fortune, it is the millions of companies that are not listed on an exchange or publicly traded that drive its financial health. Investors active in these private markets – which have been around much longer than public ones – support many facets of the real economy, as these companies need equity and debt investments. Investing in private assets enables investors to fund start-ups, expansions and new ventures, injecting cash exactly where it is needed. Working directly with companies and advising on best practice, investors do not just help the company grow, but can also focus on their specific ESG goals. This can have more impact than being one of thousands of investors vying for influence in a public marketplace.
Go with the flow
For investors that need consistent returns to fund regular payments and service cash-flow needs, private debt assets offer a steadier option than listed bonds. We have seen – most recently in December 2018 – how public market volatility is often fuelled by seemingly unconnected political and international events. Private debt assets, however, are often shielded from short-term noise and can continue to function in line with contracts agreed with an investor. Additionally, with such a large number of companies and projects available for investment, private markets can offer some protection from the cyclicality of sec- tors by spreading the risk around. Through a private debt market fund, investors can gain exposure to a range of borrowers of all sizes, types and stages in their development, as managers choose the most efficient blend of risk.
Illiquidity The key difference between public and private assets is their liquidity profiles. Investors can offload an illiquid asset relatively quickly as the ebb and flow of markets means there is usually someone willing to buy it – albeit at a (material) discount. But in giving up this quick-fire sale ability, investors in private assets earn a premium. Defined benefit (DB) pension schemes and insurers have used the approach for some years, enabling them to take advantage of their longer time horizons to draw out more returns from their investments.
22 October 2019 portfolio institutional roundtable: Private debt
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