Publications
Private Markets / Private Debt
In a context of elevated valuations across the board these past years, private debt opportunities have made their way into our asset allocation mix and will continue to do so for the foreseeable future.
Despite the spike in uncertainty driven by the COVID-19 pandemic, we are analysing a number of opportunities, backed by companies pertaining to resilient industries and showing strong balance sheets and cash positions. Private market opportunities remain one of the few pockets of inefficiencies where attractive risk / rewards can be found, coupled with a growing opportunity set supported by banking disintermediation and the power of information technology. We may engage in the current environment should we find sufficient comfort in the robustness of new opportunities and, most importantly, are building a pipeline of quality deals for when this extraordinary episode is finally behind us.
While we have been critical of the crowded space of direct lending for some time, which has ballooned to worrying proportions to support private equity sponsored leveraged buy-out programs, we currently favour private debt strategies based on factoring or bridge-financing which are effectively providing the corporate working capital that banks used to finance. This may prove even more true in the current context and banks’ inability to underwrite loans within this environment.
Our favoured strategies are very short term in nature, negating interest rate risk, regionally and sector diverse, limiting default risk and contamination, and have become a staple of corporates’ treasury management toolkit. A supplier to Siemens to be paid in 90 days will happily forego part of his margin to collect his receivables today, a margin that stays with the investor providing the facility. Ultimately, the investor is carrying Siemens’s default risk but is senior to a Siemens bond and getting well compensated to provide working capital to a SME that greatly needs it.
Similar operations can be found in real estate where bridge financing is provided to free up capital on an often pre-sold operation where development risk is mostly behind and for which banks have reached their maximum loan-to-value limit. This capital starvation commands interest rates ranging from 8-12% in euro for short maturity (6-18 months) loans where many of the risks have been purged. While the real estate market is not immune to the COVID-19 pandemic’s impact, with a majority of construction sites either slowed down or shut down, notarial offices incapable of facilitating transactions, and financing for developments on halt, the nature of the deals we are exposed to gives us great comforts as many of these risks have been purged and our secured guarantees provide us sufficient buffer.
While these loans are illiquid their short maturities generate a revolving income stream. The same cannot be said of the European high yield market, for instance, which is liquid until it isn’t, as exemplified by the recent crisis, and offers lower spreads for a higher historical average default rate.
Mikaël Safrana, CIIA, CWMA
April 07, 2020
Publications
Publications
Letter from the CIO - April 2025The first quarter of 2025 unfolded in an environment of high volatility, marked by notable divergences between asset classes and geographic regions.
April 09, 2025
Publications
The Gulf, a new El Dorado for investors?For several decades, the Gulf countries have been redefining their role on the global economic stage.
March 28, 2025
Publications
Letter from The CIO - March 2025Rising uncertainty is shaking global markets. While US equities falter, Europe is showing strength.
March 14, 2025