What asset owners look for when investing in private debt
Private debt can be rewarding to those asset owners who are mindful of due diligence at a time when macroeconomic shifts can have substantial impact on the outlook.
Current market developments call for a high level of understanding about private debt investing, especially while negotiating the proper covenants and ensuring the proper collateral is in place, managing director at family office manager Masan Capital, said at AsianInvestor’s Asia Investment Summit in Hong Kong on May 23.
Liem is also treasurer at Hong Kong Baptist University, chairing the university’s endowment and pension fund.
“If you invest with a third-party manager, you need to make sure they know what they're doing, because [private debt] is something that could blow up if you're not professional with it,” Liem said.
These views resonated with Meimei Zheng, associate director and investment strategist at Transamerica Life (Bermuda) Ltd., who sees opportunities as well as risks in private debt markets.
“From the perspective of liquidity as a life insurer, we need to consider our liability profile and pay more attention to comprehensive due diligence when we invest in private debt,” Zheng said.
DEEP UNDERSTANDING
Transamerica Life sees opportunities within private debt in the shape of both direct mandates and through fund managers. The insurer also sees sustainability opportunities in private debt markets.
“We are seeing attractive risk-adjusted return in the markets, that is the top priority,” Zheng said.
For private credit due diligence, Transamerica Life focuses on asset managers’ capacity for asset selection, their ability to source deals, and their historical loss ratio.
“A lot of quantitative and qualitative factors must be considered in the decision-making process,” Zheng said.
Liem agreed that outsourcing of private credit investments require an understanding of the value that the manager adds, since most focus on certain segments within the market. In those instances, asset managers can provide strategic insights regarding underlying borrowers.
“Having that understanding of the business model and why it works is very important, and so is understanding the value proposition of the manager. Because we don't have an investment team [for] operational due diligence, we often outsource to third party professionals, so we will rely on their expertise,” Liem said.
FINANCING GAP
Although a tough asset class to tackle, private debt demand will continue to grow as banks are becoming more selective with their lending, according to Liem.
This view was echoed at the same event by Thijs Aaten, Asia chief executive officer at Dutch pension manager APG Asset Management, who sees private debt demand arising out of regulation.
Following the global financial crisis in 2008, banks and their frameworks changed so that they had fewer incentives to lend to small- and medium-sized companies.
“Because of that, private debt is an asset class that is here to stay. And it's interesting because there's demand for financing and we as asset owners have capital. At this moment in time rates are relatively high, so it seems like an interesting opportunity as well,” Aaten said.