Managers champion diversification as yields fall

With spreads tightening, pricing under pressure and covenants loosening, managers speaking at PDI’s Germany Forum championed the diversification benefits of the asset class.



Private debt managers are pushing the diversification benefits of their funds in an environment that has seen performance squeezed and covenants loosened. Fund managers made such comments during the opening panel sessions of PDI 's Germany Forum in Munich.

Referencing a recent investor survey, Deborah Zurkow, global head of alternatives for Allianz Global Investors, noted private debt isn't being looked at as a pure yield play. “Most investors aren't looking for yield enhancement, but diversification,” she said. “There's a portfolio value that doesn't have to do with yield.”

Abhik Das, principal within BlueBay Asset Management's private debt team, said he believed private debt provided exposure to an area of the market investors otherwise wouldn't be able to access – mid-market corporate enterprises. “If you want to get access to that sector, there's not many players that offer that,” he said.

Zurkow also noted finding private borrowers offering this diversifying exposure is a significant selling point of the asset class. Structuring a borrowing arrangement to create extra yield isn't a unique skill to private debt managers, she noted.

“The USP for most private debt teams is the sourcing,” Zurkow said. “Lots of people can structure things.”

Talk of private debt acting as a diversifier rather than an income-generator came amid discussion of pressure on pricing and covenants. Increasing competition in the private debt space – bolstered by new entrants – has led to falling prices and terms of debt agreements being tailored to better suit borrowers.

Agnes Mazurek, managing director for MIDIS, the infrastructure debt arm of Macquarie Group, noted the presence of banks in Europe is squeezing the performance of private lenders.

“The abundance of liquidity has driven performance very much down,” Mazurek said. “It's not just pricing but structure terms. It might be worth taking a pause and asking how much more aggressive is this going to go.”

With pricing coming down and covenants loosening, managers need to show more discipline and geographical nous, Das said. While managers in the US, safe in the knowledge Chapter 11 bankruptcy protection exists, may be comfortable with looser covenants, managers operating in other geographies should be wary.

“[In the US] there's a bankruptcy regime that people know,” Das said. “You don't want to find yourself in an insolvency situation in certain European jurisdictions.”