Recent issues in the private credit market have heightened the vigilance of Dutch asset managers regarding deals financed by private debt providers. While they remain cautiously optimistic, they emphasize a crucial reminder: private markets lack liquidity.
In June, alarm bells were ringing in the private credit sector after Canadian asset manager Ninepoint Partners temporarily suspended cash disbursements from three of its private credit funds. This has led to a broader discussion among asset managers and their clients.
Continued confidence
Despite concerns, the general trend is a shift from public to private markets. Han Dieperink, chief investment officer at Aureus, said that this movement continues unabated. For instance, IBS’s private funds remain highly popular, with their recent IBS Private Equity Growth Fund II rapidly attracting 42 million euros out of the targeted 100-120 million euros within a year. Currently, nearly 700 million euros out of IBS’s 5.2 billion euros under management are invested in private markets.
Similarly, at Clavis, a multi-family office in Den Bosch, there is no significant shift from private to public markets. Paul van Hastenberg, head of the asset management team, acknowledged a temporary caution due to reduced distributions in 2022 and 2023, but expects a rebound as distributions pick up this year.
A shift towards simplicity
Hans Wilton of Wilton Family Office said he has observed a subtle shift among clients who are now favoring simplicity over illiquid, complex investments. There’s a growing preference for straightforward investments like equities and real estate, reflecting a desire for transparency and ease of understanding.
Conversely, Dieperink of Auréus argued for the diversification benefits of private markets. He believes simplicity and clarity are equally crucial for private equity and debt investments. Koen Ronda of IBS also emphasized the importance of clear communication, noting that he often gauges the simplicity of a new strategy by whether his grandmother could understand it.
Cost of illiquidity
Wilton remains critical of illiquid investments, stressing the challenges they pose for clients to fully grasp their value and risks. He previously offered niche investments such as music rights and legal funding but is now more cautious.
Ronda acknowledged the illiquidity of private markets, pointing out that attempts to create liquidity often lead to complications. He advises clients to limit their exposure to illiquid assets, noting that secondary trades are an option only under specific circumstances.
Ronda also questioned the desirability of liquidity in private equity, debt, and infrastructure investments, arguing that long-term holdings are essential for value creation. Dieperink added that private markets, while inherently illiquid, offer practical liquidity under normal conditions, contrasting this with the often poor liquidity of small-cap stocks and bonds.
Evaluating private debt
The private debt market is expanding rapidly, partly due to stricter Basel regulations. However, Ronda warned of the need to scrutinize loans carefully, especially in large buyouts where debt levels are high. Despite occasional defaults, he believes private debt remains an attractive investment due to higher interest rates and favorable conditions.
Van Hastenberg concurred, highlighting the benefits of higher interest rates and better lender conditions. He said he prefers smaller deals with lower debt levels for better security.
Dieperink pointed out that while returns on savings and government bonds are unattractive, private debt offers higher credit spreads and better recovery rates. He emphasized the importance of strict covenant monitoring to mitigate potential losses.
Cautious but confident
The recent turbulence in the private credit market has prompted a cautious but confident stance among Dutch asset managers. While recognizing the inherent illiquidity, they continue to see value in private markets, driven by diversification benefits and higher returns in the current economic environment. The preference for simplicity and transparency reflects a broader trend towards more understandable and manageable investments.
This article originally in Dutch on investmentofficer.nl.