Julien Halfon
Head of pension solutions BNP Paribas Asset Management
It’s always good to have options, especially when you have specific requirements. While it’s true that plain vanilla works some of the time – public market performance is ideal for certain parts of a portfolio – increasingly, investors are finding they need something more personalised to match large sections of their liability profile.
Individual problems need individual solutions and the building blocks to create them can often be found in private credit markets. For investors who only have experience of traditional gilts and publicly traded investment-grade bonds, these markets may seem like a voyage into the unknown.
But, by taking this step, investors can open a whole new world of versatile, outcome-based opportunities that can closely match their liability profiles and investment beliefs.
Deep, wide and personalised
Due to the depth and breadth of private credit markets, investors have many avenues to explore to find something that fits their needs.
While public markets may be dominated by large, international companies and governments, the range available through private markets is much more diverse, with each security offering its own characteristic that can often be fine-tuned according to investor requirements.
In addition to featuring companies in all sectors, spanning all sizes and maturities, private markets also offer a variety of risk, currency and duration profiles. The wide scope of securities means investors can find options to fit required levels of return, risk and cash generation at a price that fits their budget.
Due to the relatively closer relationship between borrower and lender in public markets, aspects such as floating rate options to hedge moves in central bank-controlled interest rates, can be ‘baked in’ at an early stage.
By trading away from public markets, investors also have a choice in the level of liquidity they want their securities to offer. Choosing those that trade relatively infrequently can help to dampen overall portfolio volatility, while securing long-dated cash-flows.
But private markets do not just offer illiquid securities. There are plenty of liquid options, too. These can be blended to create an investment portfolio that fits each investor’s profile.
Working with a partner that has in-depth knowledge of these private markets enables investors to create portfolios that are remarkably versatile, can flex to changing liability profiles and provide closely matching cash-flows over time.
This means defined benefit and defined contribution investors can allocate to private markets and see how the returns, which often beat those earned in public markets, can boost funding levels and individual member savings.
Seeing your impact
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. Not only is there a broader opportunity set than in public markets, but the nature of security selection (i.e. primary transaction origination) enables managers to embed an ESG process from the beginning.
As ESG is integrated in everything we do, BNP Paribas Asset Management employs it from the selection phase onwards. Our proprietary research and scoring methodology assesses ESG risk and best practice, while we carefully quiz each prospective company or borrower. Our internal models and taxonomies help us identify where investor capital could be best deployed to improve our corporate stance toward promoting sustainability.
By working closely with borrowers to structure credit agreements, rather than basing interest rates on market forces, managers can also ensure reasonable contracts are in place, and thereby monitor and manage credit risk. This helps produce reliable returns for investors (as reflected by lower default rates) and a contribution to their ESG score.
Working in these markets also enables investors to inject capital into the real economy where it can get to work quickly. This helps to create sustainable local markets, adding stability to surrounding communities.
The sky’s the limit
For investors who are seeking to allocate their capital to projects that use the United Nations’ Sustainable Development Goals (SDGs) as a lens, private credit markets are an ideal starting point. From social housing to infrastructure that will facilitate the energy transition; creating vital transport hubs, lending to small and medium-sized enterprises (SMEs) in the UK to upgrading outdated real estate – private credit can help investors to make a real, positive impact around the world.
With innovation that can embed sustainability into the fabric of a security, we are aiming to make private markets a clear destination for investors who want bespoke solutions created through an ESG or SDG lens – and help them better match their liability goals.