PI: What conversations are asset managers having with institutional investors when it comes to private debt? John Atkin: We do not view it as private or public debt; we just see it as financing. We look at the upsides and downsides of its various forms to find out which is appropriate for our individual clients. We try to find deals which give good value, which is a diminishing number given the weight of assets being deployed into this area.


The market has become fashionable, so infrastructure debt might not be attractive from a pension scheme perspective, whilst insurers are buying Solvency II assets.


Schemes need to find other ways of getting quality cash-flows. That might be funding the NHS or long- lease property; it is all finance in some form. Peter Martin: You are lending money. There are different labels to it, but it’s part of that holistic universe where you are seeking an income stream. A lot of people prefer contractual income and if the return is sufficient for your needs, why wouldn’t you consider those areas?


In the past 10 to 20 years, lower yields from mainstream liquid assets have meant that investors need to work smarter to achieve those returns. It is not as though these things were never out there, it’s just that you did not need to look further afield. Now people need to consider these areas to generate a return to pay pensions and insurance claims.


PI: Is debt tied to physical assets such as property or infrastructure proving more popular than unsecured lending? Oliver Hamilton: On balance no, but we are far more cautious on unsecured lending than we have been in the past. You need to look past where the money is flowing and instead look holistically at illiquid credit because relative value changes over time. In real estate debt, for example, our clients were investing in punchier, high-yielding strategies in 2012. We were comfortable with that as the banks had retreated rapidly from the market and the UK property market was expected to produce strong returns. Today, the UK real estate market is late cycle and you probably want to invest in more senior structures, rather than mezzanine.


The point is that your needs change over time, so don’t keep investing in the same asset classes. As opportunities change, reassess the situation and if needed change your views. It is also impor- tant to be aware of how individual client needs are changing and to change your advice according, for example considering less risky illiquid strategies as a pension scheme de-risks. Wellesley: When banks retreated in 2012 there was an opportunity to pick up good loans at a dis- count. The lending business has now, to a large degree, moved to institutional investors. The vast bulk of these lenders who are backing private equity have not been through an industry cycle, so it is an untested market if the eventual downturn comes. In the low yield environment, there has not been an ability to build up what banks have traditionally had which is a group of rottweilers who are good at capturing value from a loan that is deteriorating. If you have an industry populated almost entirely by people who are good at putting the assets on it’s difficult to have the appropriate safeguards in place. Assumptions about recovery rates will be optimistic. There has not been the experience to know what they will truly be and you do not have the people who are different from those bringing the loans in.


October 2019 portfolio institutional roundtable: Private debt 7


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32