Private Debt: the keys to investing in a growing and evolving market

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The private debt market is expanding in scale, scope, geography and risk profile. It is the only private asset class to have grown fundraising every year since 2011, including through the pandemic, according to McKinsey*. And the total private credit market is projected to grow from around $1 trillion in late 2021 to $1.5 trillion by 2025 according to Private Debt Investor.

In the current context of rising interest rates, inflation, geopolitical tensions and cyclical risks, investors continue to look to private debt to gain access to sectors with lower cyclical performance or to businesses with revenues well-indexed to inflation, and for its lower pricing volatility compared to public markets. While private assets are historically more cheaply priced than public ones due to their lower liquidity, investor demand is such that in many areas public markets are currently valued above comparable private opportunities.

The growing importance of private debt in investor portfolios, the continual evolution of the private debt market, and the main challenges investors have to tackle, especially in the ESG space, were at the heart of discussions at Natixis Corporate & Investment Banking’s first Private Debt Forum held in Paris on June 28th, 2022. This conference brought together key market participants in private debt, to explore different perspectives across origination, structuring and asset monitoring, and private debt investment opportunities.
* McKinsey Global Private Markets Review 2022

High rates, recession, rapid disinflation

In the macroeconomic session, Niels Bodenheim, Head of Alternative Credit at NN Investment Partners and Patrick Artus, Senior Economic Advisor at Natixis, considered the current macroeconomic backdrop and geopolitical concerns, potential central bank actions, the risks these bring to private debt investment and the subsequent impact on private debt investment strategies.

Both agreed that inflation will be a constant issue on the capital markets, and that appetite for private debt will strengthen further as a protection against volatility. Patrick Artus pointed out that low rates evolution, no recession and deflation are not consistent; he considered the most realistic scenario to be central banks raising rates to try to bring inflation down faster, causing recession.

A common definition of private debt

One main issue when considering the private debt market is first to find a common definition of this market segment. In the Global Investor panel, Alexandre Broggi, from HSBC AM, Rupert Gill from BlackRock, Richard Sherry from M&G Investments and Wim Vermeir from AG Insurance & AGEAS shared their view on the topic. They explored the evolving investment strategies required to be successful in these markets, together with global opportunities in private debt whether product, sector or geography.

Natixis CIB understands private debt as any debt instrument not available on a public exchange and which in principle therefore benefits from higher barriers to access and less volatility. These financings can be anything from quasi-equity through to AAA rated transactions. This includes lending (secured or unsecured) across infrastructure and energy, real estate, aviation, trade & supply chain financing, social housing and residential mortgage portfolios, fund financing, structured credit (i.e. securitization, CLO, ABS, CMBS), leveraged finance and mid-market corporate lending.

ESG: regulation and data, the main pain points

ESG is a consistently important topic for investors, whether new opportunities, or increased disclosure requirements and net zero transition. From equity to debt, sustainable strategies are deployed in every financial market segment including private markets. In Europe, a quarter of total loans signed in 2021 were in green or sustainability-linked format.

To integrate sustainability into their private debt activities, investors face two main challenges. First, the availability of ESG data for non-listed securities, alternative and real asset. Second, the fact that many financial institutions have net zero targets, but very few know how to deliver. Since March 2021, the European Union SFDR regulation has required investors to disclose ESG at entity and product level, in particular to classify their funds under articles 6, 8 and 9. Such classification remains challenging, especially as the regulation sometimes leaves room for interpretation.

The ESG roundtable provided insights into this evolving regulatory ESG environment and on green market practices. Marc-Etienne Sebire, from CMS Francis Lefevre gave a broad overview of the European Union ESG regulatory landscape and the main challenges investors face in implementing Sustainable Finance Disclosure Regulation (SFDR). He also explored the main risks in terms of greenwashing: where are they located, how to avoid them. He then left the floor to investors, Guillaume Boucher from ZenCap AM, Thierry Laquitaine from AEW and Vincent Lemaitre from Tikehau Capital, who shared on the classifications they have opted for their funds and the impact SFDR has on their investment strategy.

Which private debt asset classes perform better than others?

The forum ended with three thematic panels on specific asset class, contemplating how real assets, telecoms, and alternative credit markets perform in the current geopolitical and macroeconomic backdrop, how the rise of interest rates and inflation impacts investor appetite by sector, and which private debt opportunities emerge beyond real assets. Finally, recognizing the importance of digitalization for portfolio holders, speakers debated how technological tools can provide a competitive advantage. The Real Asset panel left the floor to Raphaël Brault (AEW), Marion Calcine (Ardian Infrastructure), René Kassis (LBPAM), Patrick Rouvillois (Tech Hub - Natixis CIB), Antoine Troesch (Groupe Caisse des Dépots); The alternative credit panel to Niels Bodenheim (NN Investment Partners), Munawer Shafi (Aviva Investors) and Deborah Shire (AXA IM); and the telecoms panel to Oliver Bradley (Macquarie Capital), Eelco Holst (EdgeConnex), Chris Moon (DigitalBridge Credit) and Thibault Sauvage (CDPQ).

Thank you to all speakers for their insights.

About Natixis CIB framework in private debt

As an early innovator in the private debt market through its co-lending business model, Natixis CIB developed strong relationships with investors across sectors of expertise. Over €13 billion of commitments have been secured since the co-lending business model was established in 2012, and over 120 transactions have been executed in over 25 geographies.

Natixis CIB’s private debt proposition combines leading origination capabilities, a systematic and consistent distribution of new production from our portfolio, with a focus on meaningful investor engagement, a quality portfolio management team and the possibility for managed account wrapping through its affiliated asset managers.

Aligned with its general strategic ambitions, Natixis CIB’s private debt approach is benefiting from being global, diversified, and committed to the energy transition.

Vox pop : Discover the interviews of our speakers and participants!

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