Investors explore ways to play private debt

Opportunities in private financing are rising, say executives from Bordier, Cambridge Associates and Silverhorn Investment Advisors. So how would they access the asset class?
Investors explore ways to play private debt

After speaking to a range of industry experts, AsianInvestor recently argued that private debt would provide the best risk-adjusted returns among alternative assets this year, as reported. But it is hardly a mainstream allocation and therefore not widely covered, so how does one access it?

Executives from investment consultancy Cambridge Associates, multi-family office Silverhorn Investment Advisers and Swiss private bank Bordier provided some insight.

Audrey The, managing director at Cambridge Associates, said: “Given regulatory changes such as Basel 3, the slowdown in emerging-market economies and the reduction in traditional bank lending to small and medium-sized enterprises, this should all create some opportunities for managers to provide companies with structured financing that could deliver 20% IRR-type returns but with downside protection."

Moreover, she added, this asset class is unlike venture capital or private equity, in the sense that investors get part of their capital back sooner, as some portion of the returns is typically contractual. 

“There are different ways to play it – some hedge fund managers do this,” noted The. “The locked-up vehicles tend to provide a better match to the structures and loans these managers are providing.”

Bryan Goh, Singapore-based CIO at Swiss private bank Bordier, also saw opportunities in allocating to private debt funds that lend to SMEs. “The dearth of bank credit means deals can be struck with safe and sound structures … to trap cash while obtaining healthy yields,” he said.

Alternatively, Goh suggested collateralised loan obligations as an area to look at. “The time is near to buy a leveraged vehicle owning loans. CLO tranches are trading below net asset values and loans are trading below default and recovery implied prices.”

The loan market is stressed because of contagion from the high-yield bond market, which is itself being hurt by the high representation of energy (16%) and metals and mining (8%), he explained. However, the loan market has a much lower representation of energy (4.5%) and metals and mining (2%).

Meanwhile, Hong Kong-based Silverhorn is increasingly keen on consumer loans, both secured and unsecured, and especially in Asia. Its exposure to such instruments is still relatively small – in the low single digits – but rising, said Mike Imam, the firm's managing partner.

"This is an asset class where we see substantial structural growth potential, as such platforms are filling a void in Asia," he added.

Silverhorn should continue to achieve 6-8% returns with very low volatility in 2016 on these assets because there is no mark-to-market issue and yet high predictability with regard to returns and cashflows, said Imam. "That’s because you’re looking at concrete loans, where you know what the tenors are and what terms are attached to it with regard to repayment of interest and principal.”

Silverhorn has a Luxembourg structure that invests in loan portfolios originated and managed by peer-to-peer lenders. Its annualised return in 2015 (with no drawdown month-to-month) was 7.25% net of fees.

Another investor segment in Asia that is looking at private debt is insurance companies, as reported. For instance, Thomas Spirig, Hong Kong chief investment officer at Zurich, says the asset class makes sense because his firm does not need all the liquidity it currently holds in the form of sovereign bonds.

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