‘I would definitely avoid Europe,’ says Ex-Texas ERS CIO Tull

Investors might want to consider emerging markets as events in Ukraine, rising inflation and interest rate hikes threaten to make developed markets less appealing bets for private credit, a conference has heard.

Speaking virtually at Private Debt Investor‘s APAC Forum 2022, Tom Tull, who spent 12 years as chief investment officer at the $36 billion Employees Retirement System of Texas before his departure in December, said geopolitical conflict and stagflation were currently the biggest threats to growth for investors.

“As we all know, times can change, and they’re definitely changing now, but with that comes the opportunity to pick and choose throughout the world depending on where the best risk-adjusted returns are,” said Tull.

“I think there will be some emerging markets that look very compelling… I think there are some tremendous opportunities in Asia, although I think you’re going to see inflation in Asia just like we’re seeing in the US. But I would definitely avoid Europe.”

Tull’s concerns were echoed by Dong Hun Jang, who concluded a six-year spell as chief investment officer of Korea’s 16.4 trillion won ($13.4 billion; €12.3 billion) Public Officials Benefit Association in February. Jang said Asian markets have lower levels of inflation and less risk than US or European markets.

“POBA was quite focused on the developed markets: to be honest, it’s just the United States and European markets,” he said on a joint panel with Tull. “However, I think during the past one year… [the] emerging market investment environment has improved comparatively to those developed market situations. [For] conservative public pensions, it is really hard to extend the emerging market exposure; however, now it’s kind of a good time to expand in the emerging markets.”

Emerging market private debt in Asia-Pacific offers high returns, but relationships and structuring are crucial if investors are to avoid singed fingers, as PDI reported in July last year. At the time, private credit made up only 25 percent of the lending market in Asia-Pacific, compared with 50 percent in Europe and 75 percent in the US. Estimates put the amount of private debt capital in the region at $50 billion, with China, Australia, India and Indonesia being the most active markets.

“[The] advantage will be in the Asian market,” Jang noted. “[It’s] less competitive, so there will be more opportunities. And also in the Asian market, they tend to have stronger covenants in debt products.”

Emerging markets investments are not without their challenges. GPs often tend to be smaller in size than their pan-regional or global peers and can therefore only accept smaller cheques, Jang said, noting that management teams can also have less experience than more established firms in developed markets.

“The advantages [of emerging markets] are good competitive rates of return and… it does provide great diversification,” Tull added. “The risk and the concerns are always rule of law, which we all know we have to contend with in different countries, and two would be accounting conventions, which can vary. So I think bottom line: the rewards outweigh the risk, but I think you really need to know… with whom you’re working.”