PI: When moving beyond investment-grade corporate bonds, what are fixed income investors looking at? Ben Shaw: More illiquid and unusual debt strategies. Pension schemes are coming into private debt, which is by its nature illiquid.
The pension schemes I am involved with are steering away from funds to choose their own high-yielding debt investments. This gives them debt with an equity hat on to try and get good real yields for taking some risk. It’s a combination of illiquidity and careful stock selection. Halfon: There’s an opportunity for advisers and pension funds to work together to mine the balance sheets of banks, who are still deleveraging 10 years after the crisis by selling loans. Alternatively, asset managers can also set up platforms for direct lending to SMEs. We have something at BNP Paribas Asset Man- agement that allows us to do exactly that. We can also insert addi- tional filters for ESG or impact investing, for example. We do this via our own platform because it makes more sense than using intermediaries. So in summary, you could access dozens of mid-market and SME loans either processed by the careful scrutiny of banks or poten- tially directly through an asset management platform. This is what we refer to as a dual origination engine, which allows clients to get a lot more bang for their buck. Shaw: You need to find clients who can’t get a loan from a bank or
use the bond market. By accessing that for investors you get a premium.
PI: Is that illiquidity premium disappearing as alternative forms of debt become more popular? Shaw: It is still there, but at the higher end of the spectrum – the £100m plus loans – it’s more challenging to find. The smaller you get, the easier it is to find those opportunities. Wilgar: That’s also why you see more asset-based lending strate- gies. It is harder to manipulate the underwriting. You have an asset security which is more intuitive and harder to undermine with how you write the documents. That is part of that popularity. You have to be selective. There are traps. In some meetings with private debt managers they boast about how they manage to con- vince people to borrow from them. That mentality is natural in a late cycle, but you need to think about what you’re investing in more than you did in prior years. Pickering: There are a variety of reasons why the users of capital are tapping the private markets. It is not just banks’ deleveraging; there are reasons why they don’t want the scrutiny of the public markets. Some of those reasons may be aligned with us, some may be somewhat distasteful to us and might increase the risk we are taking. That’s why most schemes are going to have to go through funds rather than have a direct relationship with the seeker of capital.
March 2020 portfolio institutional roundtable: Fixed income 9
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