Shipbuilding scheme latest to invest in private debt

Private sector pension funds and insurance companies are viewed as the most active investors in private debt. Intertrust’s 2018 Global Private Debt Market Survey found that 59 per cent of investors believe private debt funds will be considered most attractive to private sector pension schemes over time.

As competition grows, selectivity remains key and could slow deployment

Niels Bodenheim, bfinance

Trustees of the Shipbuilding Industries Pension Scheme, which has three sections and a total of 15,000 members, “agreed to a £50m commitment to a new private debt mandate with Partners Group”, according to the scheme’s latest annual review.

The investment is due to be made during the first six months of the 2017-18 scheme year and has been funded by a disinvestment from equities. It has been given a 2 per cent strategic benchmark allocation.

During the year to March 2017, the trustees continued to carry out the scheme’s investment restructuring programme, which commenced in 2013.

This included further funding of a segregated property mandate, with the commitment to the mandate being increased from £130m to £170m during the year, and further funding of another debt mandate with Agfe.

Attracted to higher yields

Barbara Saunders, managing director, solutions at P-Solve, said: “Private debt has a higher yield at the moment than public debt, so that’s one of the obvious attractions.”

The asset class also tends to be more illiquid, which fits in well with pension schemes having a longer time horizon, so “they are able to take that illiquidity to get that higher yield”, she added.

Sixty-two per cent of investors said they planned to increase their allocation to this asset class over the long term, according to a Preqin survey.

Source: Shipbuilding Industries Pension Scheme

While private debt looked more attractive to investors three or four years ago, Saunders said now is not necessarily the best time to be entering the asset class.

“The truth is we’re quite late in the credit cycle in general, which means actually borrowing for companies is fairly cheap,” so despite yields being higher than public market yields, they are “still not that high”, she said.

Saunders added that “there will be a better opportunity to enter it at a later date”.

Different outlooks 

Fifty-five per cent of investors said direct lending will be the most favoured private debt fund strategy among institutional investors over the next 12 to 24 months, according to the Intertrust survey.

Private debt can be defined broadly with main components being real estate debt, direct lending and infrastructure debt. Niels Bodenheim, senior director, private markets at consultancy bfinance, said these key components will all have slightly different outlooks.

“The range of offerings will certainly increase, making the deviation from the average return wider, but in general we would anticipate some pressure on yield for the average returns within the space,” Bodenheim said.

He noted that as competition grows among managers competing for investments, the terms become more aggressive, such as reductions in pricing.

“Sticking with good credit fundamentals, the managers will need to be selective in which deals they invest. So as competition grows, selectivity remains key and could slow deployment slightly,” Bodenheim explained.

Niche areas

He added there “is still plenty of room in niche areas or capturing market share from banks or traditional finance offerings” to keep deployment steady.

Saunders said stressed debt, which “is not actually private markets but it’s another illiquid form of credit”, is one area that can deliver “extremely attractive returns”.

The Oxford University Press Group Pension Scheme, for example, allocated 4 per cent of its portfolio to a new stressed debt mandate in 2016.

Another niche area expected to grow in popularity is investment in regulatory capital strategies – something mastertrust TPT Retirement has turned to.

More generally, Saunders said private debt can fit into one of two places in a pension fund’s portfolio. If it involves investing in high-quality companies, the asset class can be included within a cash flow-matching strategy.

It can also be used to earn returns by investing lower down the credit spectrum, essentially looking for the higher-yielding opportunities, where defaults are more likely, she added.

Murray Taylor, senior consultant and head of manager research at JLT Employee Benefits, said that for his clients, private debt usually sits within the traditional fixed income portfolio, but this tends to be the more senior part of private debt.

Many investors “looking at the more junior types of debt” may include it within their alternatives bucket, or even their return-seeking portfolio, he noted.

When looking for a private debt manager, the most important thing is to look for a manager with the ability to find good opportunities.

“Being able to source the best deals is going to be the biggest driver of returns in the asset class,” Taylor said.