LPs too focused on liquidity for fixed income

Liquidity and diversification are among the key issues investors in private debt are grappling with.

Institutional investors are too focused on liquidity issues, particularly in fixed income, an audience at Private Debt Investor’s Germany Forum 2018 has been told.

Speaking at the event in Munich today, Ari Jauho, founder of Certior Capital, said: “Liquidity is heavily overrated among investors. They need to ask why they need that liquidity and whether they are really getting that from bonds.”

Jauho said that the global financial crisis, many publicly traded bonds became illiquid, at the exact time when investors needed the liquidity and that fixed income liquidity needs should be rethought.

The panel discussion on what investors were looking for from their private debt investments also emphasised the importance of granularity.

Stéphane Legrande, Partner at LGT European Capital, said: “Investors need to look at getting true diversification. While knowing managers have a good level of control in portfolio companies is important to get protection, this does not mean you should not also seek a level of granularity.

His firm looks to invest funds in approximately 50 companies to ensure it covers a wide range of different firms and gets sufficient granularity to help manage risk and provide diversification.

He added that the risk profile of private debt is very attractive to investors at present, and is helping to encourage a wide range of different institutions to take an interest in the asset class.

“If we take a turn of leverage as a proxy for units of risk, we are able to achieve high single digit returns with very low risk. For each unit of risk you get a return of 200 basis points, which is very attractive,” he explained.

But Jauho said that the degree of diversification needed can depend on the type of lending being undertaken.

“In mid-market direct lending, you don’t need so much diversification because the risk is low. You can just run a handful of three to five managers in this type of strategy.”