The question is whether the illiquidity of private markets is still an issue if the market becomes more volatile again. Especially when you realise that liquid markets can also become illiquid.
This is what Niels Bodenheim of NN Investment Partners explained in conversation with Fondsnieuws, Investment Officer Luxembourg’s sister publication. “Last year, volatility was high for a very short time. Now that we are in the situation that inflation will play a bigger role, there will be more volatility in the books of public debt. Private debt brings more stability in your pay book with, among other things, variable interest, that is its strength.”
Bodenheim is head of alternative credit at the Hague-based asset manager. Since his appointment last year, the assets managed by his team have increased by 9 per cent to around EUR 54 billion. “The availability of financing alternatives to private equity continues to grow, providing loans to other segments,” Bodenheim explained. “We have been able to grow well with NN Group’s capital, but at the same time we are also growing when it comes to managing capital from third parties from the Netherlands and from elsewhere in Europe and from Asia.”
The growth comes not only from investments in the funds offered by the private branch of NN IP. The number of mandates managed by the fund house is also growing steadily, according to Bodenheim: “More than half of the team’s assets under management come from mandates in structured credit, corporate credit, asset backed securities, mortgages, infrastructure & project finance and commercial real estate debt.”
Buy outs
Asked about trends within private markets, he replied that the market is still very much focused on financing buyouts. So much capital has flowed into private equity recently. Direct lending is also the most written about of all the private credit categories, because it is linked to a lot of fundraising trends.
NN IP also works with private equity houses, but is not exclusively focused on buyouts, Bodenheim said. “We want to fund the real economy, so not only corporate, but also consumer risk, mortgages, government-related risk, you name it. In this way you create diversification and de-correlation with other strategies and the entire market.”
“The fact that the supply of private debt is growing considerably in the meantime helps in this respect. Also for pension funds and insurers, who focus for their portfolios on investments with a longer duration and more stability. ”
Growth from pension funds
Apart from the growing supply, there are other reasons to assume that invested assets in private markets are growing from this group. Martine Vissers, who focuses on private markets at AF Advisors, stated in the interview that there is more room for illiquid investments without credit ratings, both in the transition phase to the new pension system and in the system itself.
“The Required Capital (VEV) was often a barrier for pension funds to invest in alternatives without a credit rating. Now that the Required Capital (VEV) is to be abolished, the return-risk ratio of a strategy and how it fits in with making the investment portfolio robust will be looked at very carefully. The expectation is that this will cause a shift towards private debt, especially as the returns on fixed-income portfolios leave much to be desired.”
The research bureau has said it expects that, depending on their risk attitude, pension funds will soon allocate approximately 25 to 30 percent to private markets. Vissers explains: “Much has already been allocated to equity strategies such as private equity. Currently, pension funds invest less than 5 percent in mortgages and other private debt strategies are even smaller in the portfolio. In other words: there is still considerable room for private debt in the portfolios. Certainly also because it has a different risk profile than equity strategies, as interest payments are generally made directly.”
RFPs
Bodenheim said he notices the same enthusiasm. “We have more conversations about it, pension funds and insurers are doing more studies on the subject. You can see the increasing interest in fundraising, asset under management and on the basis of what managers say, but you can also see it in the interest shown via RFPs. “
In the questioning of pension funds, he noted that they have long ceased to focus on a single subject within the private markets, but are interested in several private asset classes at the same time. “In segments where we are active, but also outside of that. From buy outs financing, to trade finance.”
The latter segment is a category that has been developing further in the asset management market in recent years, with the advantage for investors that the expected return is faster than with many private loans. “Long-duration loans take longer to appear on the books, Bodenheim said. “Infrastructure is a good example of that. At the same time you now see that governments worldwide have switched from the coronovirus theme to the infrastructure theme. The availability of infrastructure financing will therefore increase in the coming years. With that additional supply, I also hope for additional investment opportunities.”