Smaller funds circle for bank debt investment opportunity
Smaller pension funds are uniting to make bids for lucrative bank debt assets, according to senior investment consultants.
The assets, primarily leveraged loans issued by large US banks, and secondary private finance initiative loans, are high yield instruments that are expensive for banks to hold as they entail severe capital requirements. However, pension funds are not currently subject to the same strict capital standards.
John Belgrove, partner and head of investment at Aon Hewitt, said: “For clients with substantial bond portfolios, which are very low yield, buying bank loans is starting to look like a very attractive investment.”
What we’re seeing is smaller funds grouping together to access the market through bank debt products
He indicated that the returns on the short-dated loans Aon were recommending were around 5.5 per cent a year for those “at the lower end of the risk spectrum”.
He also emphasised that the opportunity would not be open forever. “This is very much a medium-term window – a two to four-year time horizon.
“Big funds like Royal Mail, and the Pension Protection Fund, access this directly, but what we’re seeing is smaller funds grouping together to access the market through bank debt products,” he said.
Conrad Holmboe, investment specialist at Redington, said: “In light of the recent credit rally, these opportunities, which are less sensitive to general market movements than publicly traded bonds due to their illiquidity, have become even more compelling.”
He confirmed that Redington is advising on bids for bank debt by groups of smaller UK funds.
“Historically schemes have been concerned with the level of governance and upfront work required. With this in mind, we are proactively seeking out both the opportunities and best-in-class managers to bid on and manage these assets on behalf of UK pension schemes.”
Investment manager at Kames Capital, Gregory Turnbull Schwartz, emphasised the potential risks entailed in buying bank assets. “These are attractive, but also very complex, specialised investments… it’s not something you want to do as a hobby.”
He added: “Anyone doing this should have considerable due diligence capabilities, and be aware of the political risk that assets like UK-issued PFI loans have.”