Zurich, September 1, 2019 – Higher returns and constant cash-flows make private debt a worthwhile asset class
Any discussion about the benefits of asset classes for investors and their characteristics will have to include considerations about the current investment environment. Looking at historical developments is only helpful to a certain degree.
Today, we experience a unique investment environment (after more than 30 years of interest rate declines) dominated by very low to even negative interest rates and highly compressed risk premiums. The financial crisis 2007/2008 and the objective of governments to avoid low growth or a recession at any price, has led to an abundance of liquidity in the financial system. The system’s failure to put this money to work in the economy effectively has created an asset inflation.
Various factors such as regulation, politized investment guidelines, the systemization of risk avoidance and the principal-agent paradox resulted in the inefficient allocation of money. Asset classes perceived as less risky and which are traditionally better understood by less sophisticated investors, have become mispriced and their risk premiums distorted (most prominently government bonds and real estate).
An effective path to improve investment portfolios has always been to broaden the investment universe and look for new alternatives. These alternatives, as any investment, come with benefits and associated, often very specific, risks (alternative risks). As any risk factor is also a source of return, being able to open and access new sources of return, i.e. mastering new risks, will benefit investors by improving the risk/return profile of their portfolio.
In this regard private debt is a truly interesting and attractive asset class on the rise. While being an important asset class in the U.S. for years, its positive contribution to portfolios of almost any investor is only being discovered in Europe and Switzerland in the most recent years.
An important driver of private debt market growth (2007 to mid-2018: CAGR of 13.4%) is the growth of the private equity market (2007 to mid-2018: CAGR of 8.3%), because private debt is still largely used to finance, refinance and restructure private equity transactions. For the private debt asset class Preqin predicts a further significant increase to USD 1.4 trillion by 2023. Preqin estimates that in June 2018 the Private Debt market measured by assets under management (AuM) stood at USD 767 bn. Preqin also expects the market to grow to USD 1.4 trillion by 2023. As of December 2018, a loan volume of CHF 355 billion to Swiss companies was outstanding. The main component hereby are mortgage loans of CHF 251 billion, while other loans account for CHF 105 billion.
Private debt is somehow the interest and credit related twin of private equity. Both have a history of being highly intertwined and a big part of private debt exposure is related to private equity business.
However, there are more and more private equity independent niches developing. These private credit niche markets are primarily developing because of the retreat of banks from certain sectors of the traditional credit business and their reluctance to enter into new credit businesses as a result of regulation (Basel II, etc.) and the new dominance of risk management and compliance in banking.
As credit banks reduce their exposure and volume on their books and pull back from specific market segments, opportunities arise for investors to step in and profit.
Private debt, not associated with private equity, is an interesting segment of the credit market for various reasons, being: a multitude of different traditional and alternative risk factors with highly individual pricing (low standardization), attractive returns due to less pressure on risk premiums and in various time frames (short-, mid-, long-term), strong diversification potential and varying liquidity parameters. In particular, two key arguments speak for private debt investments: a higher return due to an illiquidity and complexity premium, as well as constant cash-flow from stable payouts.
On Pactum AG
Pactum AG is an asset manager established in 2016 and headquartered in Zurich. It is supervised by FINMA on a voluntary basis as an asset manager. Pactum connects the investment needs of institutional investors with the financing needs of successful companies. It offers secured investment opportunities in the sectors of real estate and mobility.
The special capabilities of Pactum AG include the identification of attractive investment opportunities in these industries. Based on many years of industry experience, financing requirements can be translated into secured and profitable investment products. The secure and fast processing of all processes takes place via completely digitized processes. Further information can be found at www.pactum.ch