Private Debt: An All-Encompassing Universe of Opportunity
As interest rates have raised considerably since 2022, there has been a considerable shift from private equity into private debt as an asset class. So much so that today, Private debt is an integral and bigger component of the capital markets matrix.
"For Natixis CIB the private debt universe is a major asset class that has been part of the bank’s strategic DNA for many years."
- Mohamed Kallala, Global Head of Natixis Corporate & Investment Banking
Now in its second edition, the Natixis CIB Private Debt Forum comes at a time when the asset class is really coming into its own and is a much larger topic of discussion for many clients.
The conference this year brought together key market participants in the private debt space, to explore different perspectives across origination, structuring and asset monitoring, and private debt investment opportunities.
The Macro and the Micro Factors Impacting Private Debt Investment
At a time when the market is in a fragile state, Patrick Artus, Senior Economic Advisor at Natixis, highlighted the upward trend in long term interest rates in the euro area, and noted a number of favorable aspects for private debt investments, notably that valuations are more stable – as illiquidity provides stability, that private debt is less risky than private equity, ESG constraints are easier to introduce into private debt, the alpha is high (typically around 7-8% returns), and the market is vast. Conversely, considering the downsides with a higher risk on property and corporate debt., he noted that due to high interest rates and monetary tightening, government securities provide higher returns and a more stable level over the long run.
Talking from a investor perspective, panelists including Andreas Kalusche, CEO - Prime Capital; Neo Mooki, Head of Insurance & Private Asset Solutions - Generali ; Hironobu Nakamura, General Manager, Chief Investment Officer - AM One Alternative Investments, Ltd, and; Joseph Pinto, CEO, Asset Management - M&G Investments, discussed with Sachin Patel, Head of Fund Financing Syndication, EMEA at Natixis CIB how market regulation of late has been geared towards making it easier to facilitate the inflow of capital into private debt markets. For example, today, the UK is incentivizing pension funds to invest at least 5% of their assets in private markets.
Technology too is being considered as a means to help create more liquidity and to democratize private credit markets. On this front, tokenization has been a key topic of discussion. Tokenization would help to reduce the cost of transactions and provide accessibility of assets to a greater set of investors. Several countries, including France, Switzerland and Singapore are leading at the forefront of this consideration. That said, from a pragmatic perspective, investment into the technology and scalability need to be achieved, which requires a significant level of regulatory cooperation across geographies to create a homogenous framework.
Significant Opportunities, with Space for Many players
Talking about the scale of the private debt market, James R. Belardi, Co-Founder, Chairman, CEO & CIO - Athene Holding Ltd., Founder, Chairman & CEO - Apollo Insurance Solutions Group L.P., and Board Member, EC Member & Partner - Apollo Global Management, Inc. discussed with Kelley Hebert, Head of Insurance & Banks Coverage US, Natixis CIB, that from a company perspective, Athene looks at Private Debt as a much broader universe than the traditional sense of definition, and thus see significant opportunities with predominantly investment grade equivalent private credit, used as a fixed income replacement – which could represent an addressable market as large as USD 40trn.
A theme that ran through many of the discussions at the forum: how will banks compete, vs non-bank lenders, in the private credit market? The conclusion - There is a natural symbiotic relationship between banks and private credit funds. Banks understand the importance of private credit to capital markets, and as private credit and private credit funds continues to grow, banks will continue to play important roles, including (but not limited to) origination and providing sourcing advice to clients.
Changing Fundamentals vs Technicals: Where are the Opportunities in Alternatives?
In the alternatives panel, Eli Appelbaum, Partner, Head of Europe, Alternative Credit – Ares; Achim Grobosch, Senior Portfolio Manager Alternative Debt Investments - R+V Versicherung; Frederic G Nadal, CEO & Co-Founder - MV Credit Partners LLP, and; Darren Thomas, Executive Vice President & Portfolio Manager - Pimco, explored, among other topics, with Emmanuel Issanchou, Deputy Head Global Markets, and Head of Global Markets Americas & Global Head of Credit Markets, Natixis CIB, the notion of whether there is a benefit to investors, to create liquidity, as the private credit universe matures. Looking at the Private Equity space as an example, once the market reaches a certain level of maturity, investors have a willingness to adjust their portfolios and trade. Private debt has now reached a point where the secondaries market is beginning to really make sense.
On the other hand, while a relatively small consideration, Net Asset Value, or NAV financing too has become much more developed in recent years and was highlighted as an attractive asset class with significant opportunity, as it allows for liquidity generation at the net asset value of the portfolio, rather than potentially taking a discount on the secondary market.
The Illiquidity Premium
While today the illiquidity premium has become somewhat condensed relative to other periods, and the private debt market continues to offer compelling advantages – and perhaps more importantly, an important factor pointed out by our speakers, was the ability to provide consistent returns, cycle after cycle, while minimizing losses.
New Frontiers in Real Assets & ESG
ESG was a common theme pervading discussions at the Forum. Certainly one factor that is driving the focus on ESG is the staggering sum needed to fund the transition to net zero. The financing gap – perhaps the largest investment opportunity of this generation – lies somewhere between USD 5 and 10 trillion until 2050.
Introduced by Bénédicte de Giafferri, Global Head of Real Assets Finance, Natixis CIB, the panel, namely Isabelle Girardet, Global Head - Allianz Trade Investment Partners; Pierre Naudé, Chairman & Chief Executive Officer – nCino; Julien Touati, Chief Executive Officer - Reed Investment, and; Remy Welschinger, Co-Founder, President - Viridian Lithium, provided their insights into the matter, in a passionate discussion with Orith Azoulay, Global Head of Green & Sustainable Finance, Natixis CIB, and Hervé Chopard, Head of Partners & Servicing, Natixis CIB.
While many transition and green projects are coming in, it’s not always easy to convince credit committees on their viability. Track records for infrastructure projects that have been done for decades, have known risk factors and are by nature, much less ‘risky’ than fundings for infrastructure such as EV Charging stations, which still have many question marks.
Indeed, the investment community today has reached a stage where appetite is there for energy and societal transition investments, but lack the necessary data – on risk management, transition potential, green features, to name a few – to scale up.
A key observation was that the collection of data has to occur at the point of origination. In fact, many investors are increasingly calling for “ESG due diligence packs” in order to be able to calculate the carbon footprints of their potential investments from the outset.
For some asset classes while not easy, it is certainly easier. For debt markets, the fact that are still no market standards, makes this more complicated and there is a need for more guidance and the implementation of market wide standards.
Enhancing the Green Weighting Factor with More Data
In terms of improving its own data collection as part of its Green Weighting Factor, Natixis CIB has recently partnered with nCino to enhance its own internal disclosure levels though building a granular and systematic process into its credit decision process.
An afternoon full of thought-provoking discussions.
Thank you to all speakers for their insights.