The world of private debt investing — a world that offers higher returns compared with what’s available in the public markets — has become a little more crowded.
“It validates what we have been doing,” said Theresa Shutt, chief investment officer of the private debt group at Integrated Asset Management. That firm started three decades back as an agent in private debt investing before switching, a dozen years back, to being a principal and investing on behalf of institutional investors.
“Private debt is the last bastion of alternative assets,” notes Shutt, whose firm invests in investment grade, senior secured loans issued by mid-market companies. Typically such investments run for five to 10 years with each investment in the $20 million range.
As for the validation, Shutt was referring to CIBC Asset Management’s decision to launch a long-term private debt pooled fund. That product, geared to institutional investors, will invest in unrated private securities issued by companies in the infrastructure and power sectors.
Those sectors weren’t chosen at random. “Infrastructure investing is about seeking stable returns through contracted cash flows while minimizing management and operational risk,” CIBC said at the time.
Carlo DiLalla, vice-president, client portfolio manager at CIBC Asset Management, said the new fund is aiming to invest $500 million to $700 million annually in 10 to 15 projects, the bulk of which will be in private P3’s, investments with terms of 25 to 30 years. The product is intended “to be another tool for pension plans to use for their asset portfolio. They have long term liabilities so need assets that are also long term.”
And compared with public market investments, investors will receive a higher coupon, and “better structured cash flows to meet those needs,” said DiLalla, noting the investments aren’t liquid and are meant to be held to maturity. For investors, the yield is expected to be in the 4-per-cent to 4.5 per-cent-range. “It’s a pickup for a pension fund which is replacing some of its existing fixed income.”
In March 2016, TD Asset Management unveiled its entry into the world of private debt with the launch of two new funds – a Private Debt Pooled Fund Trust and Long Private Debt Pooled Fund Trust. At the time, TDAM said the funds “offer a comprehensive yield-enhanced, investment grade fixed income alternative for today’s low interest rate environment.”
In late 2014, Sun Life formed Sun Life Institutional Investments to offer external institutional clients some of the investment management capability t it had been using to manage its own investments. Three of those products were for private debt.
In late 2013, Manulife Financial expanded its third-party private asset management business. Known as Manulife Asset Management Private Markets, the unit was formed to offer institutions, specialized private asset investment teams that historically had primarily served Manulife’s corporate account.
Until the four institutions arrived with a private debt offering, IAM was the granddaddy of private debt investing. Since 2005 it has raised through five funds $2.7 billion from institutional investors and has invested $1.7 billion in 90 mid-sized Canadian companies. One year back it raised, for the first time, an infrastructure fund.
Shutt said the banks are the main competitors IAM faces in its market segment. “We can offer a longer maturity, more customization which means we can beat them. And we can get a higher coupon.”
So why is private debt in demand? For starters, it’s part of investors’ ongoing search for yield enhancement in a low interest rate world. Also there’s a growing acceptance with illiquid asset classes, and there’s the drive for diversification given the large share of public corporate bonds accounted for by banks and energy companies.