Private debt: Moving up the risk curve
Lending money is one of the world’s oldest forms of investing. Yet today, thanks to the emergence of an organised banking system and the creation of the bond markets, lend- ing money directly to the borrower is classed as an alternative asset. But private debt, as it is now known, is back in fashion. The banking crisis and the disappointing returns offered by investment-grade debt that followed have put many institutional investors under pressure as they are struggling to generate an adequate return in the bond markets.
The investment landscape may have changed, but the obligation to pay members’ ben- efits on time and in full has not. A preference for regular contractual income streams to cover these payments also remains unchanged among defined benefit (DB) scheme trustees and insurers.
So private debt, a diverse universe that includes lending directly to companies and loans secured against office blocks and warehouses, fits the bill, especially after regulation forced banks to retreat from lending to some businesses. Higher yields, which are now missing from the typically more secure and liquid forms of debt, and a greater say on the terms of a deal proved attractive, while difficulty in getting your money out quickly should be considered as a potential downside. But more than a decade after the financial crisis, it appears that the good times have gone. Increasing competition has seen yields squeezed and investors are signing deals that give them fewer protections than they once enjoyed. As we are entering a new economic cycle and with many direct loans unsecured and not carrying investment grade ratings, many institutional investors could be about to realise that there is more to a loan than getting a company to sign on the dotted line. This is only the start of the process. Do they, for instance, have the expertise to get their money back if defaults rise?
So with the private debt landscape changing and concerns that a riskier environment is on the way, we thought it was a good time to bring lenders, their asset managers and advisers together to find out if the party is over for institutional investors in private debt.
Mark Dunne Editor, portfolio institutional
Contents
P4: Private debt roundtable With returns falling and fewer covenants included in loan agreements, we bring some of those involved in the market together to find out if private debt is worth the risk.
P20: Private debt and diversification Aon’s Oliver Hamilton looks at how insti- tutional investors can mitigate the risks of private debt investing.
P22: Bringing private credit to a wider audience Julien Halfon of BNP Paribas Asset Man- agement gives his take on why investors should consider private debt.
P24: Private debt – firmly on the radar
M&G Investments’ fixed income direc- tor, Jo Waldron, explains why she thinks allocations to private debt are set to increase.
P26: Too hot to handle? Has the direct lending market become a victim of its own success? Mark Dunne reports.
October 2019 portfolio institutional roundtable: Private debt 3
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