As investors’ needs change, should they seek Alternatives?
In times of instability, when listed markets are affected by elevated volatility and persistent low rates, could a different choice benefit both investors and economic realities worldwide?
Today, the global economy is living through one of its toughest cycles, with low rates and low growth, even before the COVID-19 outbreak, the world was experiencing increasing levels of volatility. In this ‘new normal’ environment, it’s crucial to identify the optimal sources of yield. For a long time, the listed markets have been the traditional option for many. However, now more than ever, it’s important to consider alternatives that might better tackle today’s challenges.
FROM CHANGING NEEDS…
Interest rates are low across developed markets, posing a challenge for investors seeking healthy yields from government bonds. Also, the elevated levels of volatility significantly affect the performance of bond and equity listed assets. In times like these, investors need alternatives to the public markets to find long-term, predictable and stable income. Adding to an investment portfolio with an allocation to alternatives may help match large sections of a liability profile, along with the added benefit of diversification to manage and mitigate risk.
…TO CHANGING DIRECTION
So, where to look for solutions? While public markets may be dominated with large, international companies and governments, the range available through private markets can be much more diverse, with each security offering its own characteristic that can often be fine-tuned according to investor requirements. Also, in a time when governments are (and will be) particularly overwhelmed by the need to make difficult decisions to prioritise spending, private credit markets mean investors can finance the growth of the real economy while seeking positive returns. Private credit and real assets are a fundamental part of the worldwide economy. That is, such investment creates jobs and wealth by growing tangible assets, and by supporting renewable energy, telecoms and transport infrastructure projects that might not see the light otherwise.
Private credit markets offer a largely untapped world of versatile, outcome-based opportunities, that can closely satisfy investors’ appetites and beliefs. Although, to consider them a suitable alternative, it’s necessary to evaluate carefully both the advantages offered by this sector and the barriers to accessing it – barriers that, in the past, have been keeping non-bank lenders out.
REAL ECONOMY, REAL OPPORTUNITIES
The private credit and real asset market is a large and broad investment universe, covering areas such as infrastructure, real estate, direct lending and SMEs. It offers a variety of risk, currency and duration profiles, and therefore is an effective diversifier of wider portfolios. As an asset class, it is typically more illiquid compared to listed assets, but it includes plenty of relatively liquid options, too – that can be blended to create an investment portfolio that fits each investor’s profile in terms of size, sectors, maturity, access, and more. Also, for investors seeking more than a simple financial return on their capital, private credit markets provide great scope to boost environmental, social and governance (ESG) portfolio characteristics.
Typically a longer-term solution, investment in private credit assets can offer stable income with relatively contained levels of volatility compared to listed markets. Many asset classes have only been marginally impacted and can be quite effective in terms of capital preservation. Also, tangible and enduring assets – such as office, retail and real estate – have an enduring sell-on value even in the case of their owners facing difficulty in the short term.
SMEs (Small and Medium Enterprises) are a vital part of the broader spectrum of private credit opportunities. They’re innovative, tend to challenge existing business paradigms, and represent the vast majority of enterprises in Europe and the US. Nevertheless, SMEs often struggle to obtain financing from the traditional banking sector, especially since capital reserve requirements have risen, so they might struggle to survive in the current economic climate. SMEs can, by nature, be more risky than larger enterprises, but a good understanding of the sector can help investors pick the most profitable opportunities and achieve yield from the real economy’s rising stars. After all, today’s superstar companies are yesterday’s SMEs.
ACCESS IS KEY
When it comes to private credit investing, the real barrier has always been access. Recent disintermediation, though, has meant that banks are not lending money as they once did. This implies that access to credit for companies is proving harder to obtain, but also that it’s a lot easier for non-bank lenders to step in and bridge the gap. In recent years, the sector has been growing, filling up with attractive investing opportunities. Accessing it doesn’t just unlock the benefits of long-term, predictable and stable income, but also the possibility for investors to have a more direct, personal and significant control over the actual destination and impact of their investments.
OUR EXPERTISE AT YOUR SERVICE
In conclusion, the breadth and depth of private credit is likely to offer the diversification, long-term cash flow, liquidity and secure lending benefits that, in today’s unstable economic world, traditional channels might lack. Instability produces opportunity, as we at BNP Paribas Asset Management know by looking at investing from all angles.
Our private credit experts have been investigating the yield opportunities that we can offer to our clients, utilising the wealth of expertise and accessing the credit market through our international banking operations. We have 50 dedicated credit professionals operating in the private credit and real assets division, supported by the resources of the wider BNP Paribas Group network. We’ve also built a specialist SME alternative lending platform, as well as a suite of solutions to aid pension fund gaps and flows.
In private credit and real assets, as we do in other fields, we investigate what others may miss. We take a holistic view of the broader credit market – monitoring across segments, with customisation and geographical diversification in mind. From origination through to selection, our focus is on identifying the best opportunities for our clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
THEMES AND CAPABILITIES
Find out more about our investment themes and capabilities.