Australian state investor the Future Fund has been building up its exposure to private debt as part of a wider move into riskier fixed-income assets beyond its normal corporate bond allocation.
Corporate debt accounts for 17% of its A$85.2 billion ($81.5 billion) in AUM, and at the moment, the fund has no exposure to sovereign bonds, notes Mark Burgess, president of the fund.
Private debt meanwhile represents around 5% of total assets, with the exposure provided by several credit fund managers. The fund is looking to take advantage of the inefficiencies in this market, said Burgess, speaking at the FT Asset Management Summit in Hong Kong yesterday.
The fund has recently started a shift into more risky assets, he adds. “We are coming to the end of a long bull run and are entering a time when so-called chasing yield could become an issue for investors. People have to think long and hard about how to approach the next phase when assets become expensive, making buying more difficult.”
The Future Fund's move to boost private loans exposure reflects an ongoing trend among institutions globally to allocate further down the credit spectrum in search of higher yields. Increasingly investors are taking up the role of providing financing to companies, as banks have become more limited in terms of the amount of loans they can provide.
“Intermediation is up for grabs,” notes Burgess. “Managers are looking to step in and help resolve the intermediation question.”
“The first step is to identify world-class credit funds,” he adds. “There are not many, but it’s a growing area. We’re looking at places like Europe and the US. Distressed debt is a great area, but getting harder to find value because prices have rallied sharply.”
"There is a lot of demand for infrastructure but primarily in purchasing existing assets”, he notes. The fund has typically only invested in projects at the brownfield stage, but has been working with the industry to discuss ways to unlock greenfield investment.
Burgess says Japan may be an area to consider if, as part of the third and final 'arrow' of the government's three-pronged policy to boost the economy, such assets are put up for sale. But this final part of the plan – which includes other moves such as getting more foreign investment and domestic structural change – may be difficult to complete, and suggests that this will be a "tough period" for the country.
Asked whether hedge fund investments are more suitable than private equity for playing Asia, due to the large proportion of family businesses and significant public market inefficiencies in the region, Burgess agrees this is a valid point.
The fund has some PE holdings in Asia, but he admits there are many firms that have no need for private equity. “Maybe a greater need for it will emerge in the coming years.”
However there is certainly scope for hedge funds, adds Burgess, but in some cases markets are not deep enough for such players.
In terms of other asset classes, the fund has 40% in listed equities, 15% in hedge funds and 7% each in private equity, property and infrastructure. “The fund is deliberately diversified," says Burgess. The internal investment team is 40-strong, and it uses external managers for most of its assets.
The Future Fund is relatively young, having been set up in 2006 to help meet the cost of public-sector superannuation liabilities.