So in extreme environments, SME loans don’t suffer as much as big companies. You have a risk/return profile which is attractive for long-term investors. Shaw: What’s interesting is when you get down to the smaller loans, you can get asset backing to those loans. Directors put homes and factories as additional security which is meaningful when you have small loans. Wilgar: You can get more transparency on the borrower by seeing more of the financials because of that direct communication channel.


It is a different risk. As the private markets open up even more, we are seeing the different types of risk you can access through a closed-ended structure. That is where you get onto litigation finance, some of the more structured, secured assets, different types of bank balance sheet financing, the parts of the market that add value. It is different risk as much as riskier. Halfon: If you add private debt to a traditional asset allocation of 30% equities and 70% bonds, you start to play around with its risk- return profile. By switching 20%, 25% of equities or traditional bonds to illiquids you not only change the volatility and return but the overall cash-flow produced by the invested assets also changes quite fundamentally. A lot of DB schemes are coming to the end of their life and so cash-flow management is pretty much a requirement, while for DC schemes it can provide a yield pick up over the long term.


I am slightly sceptical about this idea of the illiquidity premium being purely a premium for illiquidity. Derry Pickford, Aon


PI: When someone says direct lending these days it is usually fol- lowed by the term “cov-lite”. Has increased competition in this asset class made riskier assets even riskier? Shaw: We have seen lenders fighting for a deal and so the price becomes economical in its risk. That’s particularly in the larger transactions. Halfon: Back in the infrastructure equity bubble before 2008, the world was chasing the same infrastructure projects and the prices went up and up and up.


In the $100m to $200m deals, you have a lot of competition. You have a similar amount of work for a $10m loan as for a $100m loan, which has a higher profit, but you have more competition. So then larger size loan has become a more difficult segment of the market. Wilgar: The sophistication of the borrower comes into play less when you have private equity sponsors who are the borrowers. They are savvy, they know what they are doing and can be aggres- sive in forcing underwriting standards down. Whereas if you are lending to a family company, someone who’s more interested in building relationships and less willing to spend the time and effort to drill down and mess with the underwriting, then you potentially get things that are more defensive and you can expect to pay back more in a recovery scenario. Cielinski: Credit cycles are defined by having a lot of debt. But then


12 March 2020 portfolio institutional roundtable: Fixed income


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