Looking ahead to a bigger playing field

Panellists at our Investor Day predicted a bright future for the asset class, but there was a word of warning for US managers to up their game on ESG.

With insurers wanting more private debt, bank retrenchment opening the playing field even further for direct lenders, and investors feeling the health crisis has given them a better overview of the asset class, the LP panel at our Investor Day this week was a largely optimistic affair. However, one or two concerns were also expressed. Some of the key talking points were as follows:

Insurance appetite growing: Insurers want to increase their corporate debt allocations while diversifying away from public markets – which is good news for private debt. One representative of an insurer on the panel said they were looking at multiple geographies to increase private debt exposure, including some new markets. More flexible regulation has helped insurers, allowing them to evolve their allocations from tactical to strategic.

Bank retrenchment part two: Banks operating on a cross-border basis have been observed retreating to their home markets, even as demand for finance grows – and debt fund managers, not surprisingly, have been taking advantage. In some ways, it’s a re-run of the global financial crisis, though not perhaps on quite the same scale. Also, it’s not just direct lending that’s benefitting from the trend – in asset-based finance, the retreat of the banks is equally noticeable. It was mentioned that some infrastructure equity specialists have been launching credit products in response to demand from portfolio companies.

Better visibility: One panellist commented that some portfolios appeared to be holding up well through the crisis while others had a lot of issues. Unsurprisingly perhaps, there was a big discrepancy in the quality of different managers’ reporting and overall communication. But LPs were encouraged that the asset class’s first big test would provide them with a better data set with which to make decisions in future.

The rise of evergreen: The view was expressed that staying invested is a challenge for some LPs wanting to build strategic asset allocations to private debt. Constantly getting money back is not necessarily what they want and that’s why there is an increasing interest in evergreen vehicles. Such initiatives have raised questions about appropriate redemption mechanisms and how carried interest gets levied, but they definitely appear to be a bigger part of private debt’s future.

US managers’ ESG deficit: There was a feeling that the ‘S’ is now the major focus within ESG as private debt managers wrestle with how best to incorporate social aspects into their investment processes and frameworks. The view was also expressed that, with European managers further down the road than their US counterparts in terms of embracing ESG, Stateside managers are waking up to the difficulties of raising capital from European LPs – especially those based in the Nordics – unless they up their game.

Write to the author at andy.t@peimedia.com