Loan Note: Investors in strategic overhaul; Golding reveals extent of FOF diversification

A new survey from bfinance finds the appeal of private markets remains intact as investors seek to diversify. Plus: Golding urges regulators to consider fund of funds' role in reducing risk; and Pictet hires a trio for its private debt strategy. Here's today's brief for our valued subscribers only.

They said it

“We are sitting in a market that is close to a credit crunch”

Raimondo Amabile, global chief investment officer at manager PGIM Real Estate, speaking to the Financial Times [read here – paywall], says there is still finance in markets such as Milan and London, but costs are two to three times what they were a year ago.

First look

Dividing the pie: investors are being forced into strategic re-evaluations (Source: Getty)

Investors diversify, with private markets in favour
Here are some of the key findings from the latest Manager Intelligence and Market Trends quarterly report for Q3 2022 from consultants bfinance.

Forced diversification: With the traditional 60/40 stocks/bonds portfolio having lost a fifth of its value so far this year, investors have had no option but to re-evaluate their strategies and diversify. Marco-economic shifts have created “an unprecedented investment environment”.

Avoiding risk: bfinance’s Risk Aversion Index has crept upwards with multi-asset managers reducing their equities exposures to 10-year lows (around 28 percent at the end of the third quarter).

Private markets retain appeal: Despite macroeconomic headwinds starting to blow more fiercely, investors are anticipating strong upcoming private markets vintages. bfinance says its clients are increasingly searching for private markets managers.

Emerging markets catch the eye: Strong demand for emerging market strategies is noted within equities and fixed income, with nearly half of new manager searches for the 12 months to September being for emerging market debt managers – up from 22 percent previously.

Banks not helped by regulators over funds of funds, says Golding
A white paper from Munich-based fund of funds manager Golding Capital Partners claims to make clear the extent of diversification that funds of funds can achieve and argues that the consequent reduction of risk for investors is not reflected in the regulation of banks’ investment activities.

By measuring over 100,000 data points from 2000 to 2021 – covering buyouts, infrastructure and private credit – Golding found that the volatility of quarterly returns for investors was down by 90 percent when investing through funds of funds compared with making individual investments.

However, Golding believes that these diversification benefits are not sufficiently recognised by the Capital Requirements Regulation III institutional regulatory framework, which means banks are using the same high capital adequacy ratios for broadly diversified funds of funds as they are for more volatile individual fund investments.

“This one-size-fits-all approach ignores the differences in the risk profiles and so could even encourage banks to make much riskier investments,” said Christian Schnabel, managing director at Golding. “This would run counter to the declared objective of making bank balance sheets more resilient.”

Essentials

New hires as Pictet readies fund launch
Andreas Klein, who joined Pictet Asset Management earlier this year to head up a new private debt team, has been joined by three recruits as the firm prepares to launch a direct lending fund next year.

Klein was previously a managing director at ICG, where he spent eight years helping to set up and build out the direct lending strategy. He has been joined this month by Axel Cordonnier, Jan Reichenbach and Christian Eckert.

Cordonnier joins as head of private debt, France, and is based in Paris. He was formerly at Ares Management for over a decade and was a principal in the private debt investment team.

Frankfurt-based Reichenbach becomes head of private debt for the DACH region, having previously been a managing director and head of DACH and Netherlands private debt at Muzinich, where he grew the mid-market direct lending platform.

Joining Reichenbach in Frankfurt is Eckert, a senior investment manager. Eckert worked for NIBC Bank in Frankfurt as part of the leveraged finance team.

Geneva-headquartered Pictet says it plans to launch a direct lending fund focused on the lower mid-market segment early next year.

Flavours of the month year
LPs are increasingly looking towards infrastructure and private credit as hedges against inflation. That’s according to two senior investment advisers affiliate title Private Equity International has spoken with in recent weeks, who noted that both asset classes are likely to become key focus areas next year. Beyond their defensive characteristics, one executive said there are “just more flavours of ice cream” when it comes to opportunities to invest in these areas.

“Twenty years ago… private credit wasn’t even a real thing – it was distressed or mezzanine, which is very different than the senior collateralised lending we’re talking about in private credit today,” the adviser said. “You’re seeing that sort of confluence of things where, yes, it’s an interesting strategy in infra and credit because of the rate environment, but at the same time the ecosystem of available funds, managers, financing capabilities and skill sets is just more developed and more accessible for more investors.”

Precisely what these increased appetites for other asset classes will mean for next year’s PE allocations, particularly given that many LPs are already overexposed, remains to be seen.

LP watch

Institution: Texas County & District Retirement System Headquarters: Austin, USAUM: $41.7 billion Allocation to alternatives: n/a

Texas County & District Retirement System committed $250 million to Silver Point Specialty Credit Fund III, according to its published recent investment activity.

Founded in 2002, Silver Point Capital is a Greenwich-based investment adviser focused on credit and special situations investments in the US. This is the third fund in their Specialty Credit series. TCDRS committed capital to both the fund’s predecessors, Silver Point Specialty Credit Fund I and Silver Point Specialty Credit Fund II.

TCDRS’ recent fund commitments are focused on the corporate sector in North America.


Today’s letter was prepared by Andy Thomson with John BakieChristopher Faille and Robin Blumenthal