Investors seeking alternative and resilient sources of yield in the face of ‘lower for longer’ growth and inflation are increasingly eyeing private debt and real assets. David Bouchoucha, chief investment officer of private debt & real assets (PDRA), discusses the attractions of the asset class.
As the economy goes through a rough patch, what is the outlook for private debt and real assets?
We are yet to see the full impact on the real economy. It is true that the effects of the pandemic have hit the economy hard, but there has also been generous support from monetary authorities and governments. That has meant that the impact on many corporates has not been huge. What has indeed changed is the perception of credit risk. We have seen a huge wave of downgrades, for example, in the leveraged loan markets, in some cases by up to three notches.
In the lending segment, which includes infrastructure and real estate, corporate lending has been hit the hardest. You have to differentiate, though, between
- small and medium-sized companies (SMEs) that have been affected structurally
- companies that have benefited from government support
- companies for which the impact has been neutral or which have even been able to benefit
This last category would include office, healthcare and logistics companies. Hospitality companies and those in retail property have been hit hard.
So, it is important to be selective in this asset class and find quality companies that are resilient. For example, those focused on sustainability issues or renewable assets.
What is the role of private debt and real assets in the hunt for yield?
Many investors, such as pension funds, are looking for alternative assets when hunting for yield. The resilient nature of private debt and real assets can make them attractive options. You can expect a general repricing of risk as the perception of risk changes, as you would in any crisis, which is good for investors as it can create attractive opportunities to enter the asset class.
Patient and selective investors will wait for better prices so that they can pick the right credit at the right price and earn additional returns in an environment where central bank and government support mean that yields are likely to stay low for longer.
Private debt and real assets also offer investors diversification opportunities. It is an asset class that involves investing in durable assets across economic cycles, in assets offering a liquidity premium and a risk premium over other (fixed income) assets, and in assets with predictable cash flows and thus offering a steady income.
ESG challenges and opportunities
As more and more investors are asking for investments based on ESG criteria and adopting a sustainable finance perspective, where are the opportunities in this asset class?
The first thing to say is that ESG is fully integrated in our investment processes; BNPP AM uses proprietary research and its own scoring methodology so that as a company, we can identify businesses with high environmental and social added value.
Implementing ESG selection criteria in private debt and real asset investing is important, but it can be quite challenging. SMEs typically do much less reporting. Information is scarce or sometimes just not available, so you lack the public data to be able to judge if a company is doing well on ESG factors.
We address this by investing time in gathering data and scoring issuers ourselves. Our in-house Sustainability Centre plays a central role in this. We also systematically send questionnaires to SMEs to ask them about their governance, social, employment, and other policies.
One of the effects of the pandemic has been a bias to sustainability. Quite a few stimulus programmes to support economies have sustainability aspects embedded within them and will target climate change and the energy transition. Now more than ever, investors should aim for resilient, quality investments. Private debt and real assets fit that description well in our view.
- Further reading
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 Ratings agencies rate the creditworthiness of issuers of bonds, including corporate bonds (‘credit’), on scales ranging from, for example, AAA to D. A downgrade by three notches could take a rating from an investment-grade BBB- to a high-yield (‘junk’) BB-. This could have implications for the compensation investors ask for investing in such a bond, making the bond more costly for the issuer. Also see https://en.wikipedia.org/wiki/Bond_credit_rating
 Environmental, social and governance