Canadian Investment Review

Institutional investors and private credit

Written by Yaelle Gang on Tuesday, November 13th, 2018 at 10:15 am

13627736 - pair of semi detached housesSeventy per cent of all private credit committed capital comes from institutional investors, says a recent report, Financing the Economy 2018, released by the Alternative Credit Council and Dechert LLP.

The report looked specifically at capital committed by investors to private credit managers.

Janet Rabovsky, partner at Ellement Consulting Group, says that many pension funds were scarred coming out of the financial crisis and with volatility in equities and declining interest rates, plans began to consider how they could structure their assets better and started to look to private credit strategies.

Jiří Krόl, Deputy CEO of the Alternative Investment Management Association and the Alternative Credit Council says that although private credit is a relatively new asset class, it has been embraced early by institutional investors because they have a familiarity with the underlying risk, it is relatively simple and it started to grow at the time when fixed income yields were declining, making it an attractive option.

“Credit fixed income investments is something people, hopefully, understand very well already. So, it doesn’t take much in terms of additional education around what the strategy is trying to achieve and how it works. It’s relatively simpler to understand than, let’s say, complex trading strategies that use a lot of derivatives,” Krόl says.

Read: View Private Credit Demystified

When pension plans decide to invest in private credit there is a large education component, Rabovsky says.

Pension plans must understand what kind of private credit they are interested in so that they can learn about the pros and cons of the various options. She also highlights the importance of understanding risks and that these are illiquid assets.

“You have to walk through all these different questions with them, so that they can figure out the role that it’s going to play in their portfolio,” she says.

Rabovsky also says that choosing the right manager is key.

“We won’t put money with someone who hasn’t actually invested through the last credit crisis because when the next one comes, and no one knows what’s going to trigger it, we want people who aren’t going to panic,” she says, highlighting that while the next crisis won’t be the same as the last, it is important to have a manager with a strategy to get through it gracefully with minimal or no losses.

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