PDI has spent the past few days in Munich at our inaugural Germany Forum. Listening to the sometimes fiery panel discussions, friendly coffee break chats and intimate cocktail reception conversations, it became clear to us that Germans – and in this context we mean German institutional investors – like big brands.
We came here to bring German investors together with the private debt community. We succeeded and the message PDI heard was that those investors want to access private credit investments via big marquee-name managers with a track record and the ability to take substantial commitments.
On another key point – where to find investment opportunities – there was also more or less unanimity in the room. Many of the advisors and managers present said the best investment opportunities are to be accessed through niche strategies. Private debt is a case in point, and in a short period has demonstrated its attractiveness to investors by offering a range of sub-strategies, from trade finance to asset-backed bridge financing. These niches can offer investors strong risk-adjusted returns, argued their cheerleaders at the conference.
Explaining the preference of German investors for the big beasts of private lending, Andreas Kalusche, a managing partner with German investment advisory and management firm Prime Capital, pointed to before the financial crisis when German insurers were the largest investors in CLO equity. Seven years on, the investment professionals who made these decisions are in many cases gone, or if still there, they now take a risk-averse approach. Unsurprisingly, therefore, it’s the IBM-like product providers they are most likely to back.
The trouble with this is that big brand-name managers and specialist strategies don’t always go together neatly.
To illustrate: for Kalusche, whose firm advises investors on both lower yielding private debt plays as well as richer return niche opportunities, one of the most compelling ways into corporate debt in Germany, as well as other European jurisdictions, is via debt managers that do deals using exclusively German language documents under German law. These funds get access to transactions that 'the London guys' as he dubbed the bigger firms never get to see. So investors are going to have to make a choice: either stick with the London crowd and miss out on Kalusche’s favourite Deutschland play, or throw in their lot with a lesser known provider with a German footprint.
It has always been thus: to buy ‘best-known’ is not necessarily to buy ‘best’, and investors keen to earn the extra turn on their capital will need to make good judgement calls as to which of the not-so-prominent managers will achieve the finest results. And not just in Germany either, by the way.