@Aberdeen Standard Investments.
Private debt is not widely offered to credit investors. So the ability to originate transactions is a crucial part of the multi-sector private credit strategy, allowing the manager to capture the best available opportunities. The challenge is to create a diversified portfolio over time – especially as visibility on the pipeline of transactions can vary across asset classes. For example, infrastructure debt transactions often take many months to complete, while private placement for corporates can be executed in just two weeks.
Institutional investors continue to see a decent flow of opportunities. One factor behind this is that the banks are deleveraging and so are less willing to lend. In addition, the low-yield environment and Solvency II capital requirements have incentivised insurance firms to increase exposure to private credit. Private credit offers predictable and stable cash flows that match their liabilities, with the potential for higher long-term returns.
A robust governance and operational platform are vital for private credit investments to be scalable. From a strategy prospective, a private-credit house-view covering trends, fundamentals, technical analysis and valuation on each asset class can help portfolio managers implement the investment strategy with optimum efficiency.
With the wide range of opportunities across the rating and duration spectrums, multi-sector private credit strategies can be tailored to suit a client’s risk appetite and return expectations.
For example, the strategy may be relatively defensive, with opportunities across high-rated public sectors (local authorities, social housing, universities). These typically offer very long maturities (over 20 years) and bullet repayment. Or the strategy may move down the credit rating spectrum to capture more attractive returns.
To successfully allocate to private credit requires experienced sector specialists, and cashflow modelling and structuring. While bottom-up credit selection is crucial, overall portfolio risk can be adjusted by careful assessment of macro and geopolitical drivers. This allows investors to outperform across different market environments and deliver consistent returns. Investing in shorter-maturity bonds and amortising bonds is a good way for investors to adjust sector allocation (tactical asset allocation), as the loan matures and the market environment is evolving. In addition, investments with positive social and environment impact continue to garner attention. Social housing and renewable energy are likely to remain a major consideration for insurance and pension fund asset allocators.
