Jelle van der Giessen: The category of loans is very broad and there are many different types of loans, such as private markets and fixed income investments.
Therefore, the reasons for entering into the loans investment space can vary significantly from one investor to another.
One of the key reasons for many insurers wanting to enter this space is that of the illiquidity premium.
In certain cases, there are different correlations with other asset classes, such as with infrastructure loans as well as there being certain asset classes which have security, like commercial real estate loans or mortgages, where you have direct access to collateral.
In the case of Small to Medium Enterprise lending, these are a type of asset that are normally more difficult to buy in the public markets.
"The challenges to investing in loans are those of the internal ratings and
that the risk assessment is more intense that for public markets."
These factors have played a large part in why investing in loans has been popular in the US and is now beginning to be so in Europe too.
The challenges to investing in loans are those of the internal ratings, the risk adjustments to monitor valuations, and that the risk assessment is more intense that for public markets as the assets will be in the books until maturity.
Another challenge faced by investors is that of sourcing investment quality assets.
It is not as easy as in public markets, where you can decide what you want, determine your portfolio, and start buying.
You need to have relationships and contacts to be successful in the sourcing a good quality loans.
Also, because you hold loan investments to their maturity, the alignment with the institutions who generate the loans is very important, so that they can take good care of your interests.
Jelle: For institutional investors it needs to fit into your Strategic Asset Allocation (SAA) plan and you need to be clear on the asset class criteria, how this enters your balance sheet, i.e. what kind of cash flows you need, and what kinds of risk you want to take.
To be successful in private debt investing requires experienced staff within your organisation who understand the asset class, because there are many kinds of private loans.
"To be successful in private debt investing requires experienced
staff within your organisation who understand the asset class."
It is necessary for you to truly understand what you are buying into, because once you are in it, it is very difficult to sell out of again.
Again, alignment with the institutions who generate the loans is an important element to be aware of.
If the institution that you are going to work with has significant alignment with what you want to invest into, then it provides additional control, security and safety into where you’re placing your investments.
Jelle: As we are getting closer to the end of a market cycle, I would start with safer types of private loans, like ECAs (Export Credit Agency) loans, which have a sovereign guarantee.
I would also argue that Dutch mortgages are a safe and interesting area to invest in and, although we have seen valuations increasing, I feel that there is still value within commercial real estate loans to be captured.
"As we are getting closer to the end of a market cycle, I would start with
safer types of private loans, like Export Credit Agency loans."
If you are clear in what you want, and feel that your alignment is sufficient, then SME loans are also still a possibility.
I would be careful with direct lending to leveraged companies or leveraged finance corporations, as we are a late in the cycle to start moving into these areas.
Jelle: You need to have a SAA and understand what cashflows you want, as certain private loans are floating, and others have very long fixed maturity, so it needs to be part of your interest rate matching or interest rate policies that you have.
At the outset of allocating, you need to be sure that your exact risk appetite is clear.
I would stipulate that diversification is a very important point, as we have not yet seen a downturn in this asset class, only banks have had that experience. Therefore, I would diversify and be careful to not take large single participations.
Jelle: It is part of our mandate, so whenever we give a manager a new mandate, ESG considerations are a part of them.
We are very clear on what we want and don’t want.
"Whenever we give a manager a new mandate, ESG
considerations are a part of them."
Although it is more anecdotal than structural, you have the opportunity as an investor focused on ESG to engage directly with companies at the start of the loan investment, so that within the initial documentation you can agree certain issues that are important. This isn’t common practice but it is possible.
In certain cases, you could engage with companies in the early stages and this can become quite successful.
