Sovereign, pension funds double down on private debt amid pandemic

·3 min read

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By Tom Arnold and Saeed Azhar

LONDON, Feb 18 (Reuters) - Sovereign wealth and publicpension funds are bolstering their funding of private debt, withclose to $9 billion committed since the COVID-19 crisis as theyhunt for yield and their ample liquidity allows them to take onmore risk than banks.

Most recently, Saudi Arabia's Public Investment Fund saidlast week it had become an anchor investor in a new $300 millionshariah credit fund. Queensland Investment Corp (QIC), aninvestment arm of the Australian state, last month became thelatest state-owned investor to launch a private debt team.

Last year marked a tricky time for the asset class. Private-debt fundraising declined substantially and commitments todirect lending, the largest chunk of it, fell by more than half.

But as the uncertainty surrounding the pandemic lifts,activity is expected to pick up in 2021. State-owned investorswith their deep pockets and long-term investment horizons are atthe forefront.

"Now we are seeing real interest from sovereign and pensionfunds that wasn't there a couple of years ago," said AntoineJosserand, head of business development at pan-European privatecredit manager Pemberton Asset Management, which counts bothtypes of investors as clients.

"It's a reflection of the fact that they recognise the meritin terms of diversification of their alternative asset bucket.Others, as part of their fixed-income portfolio, are trying tofind the best relative value they can in the current negativerate environment."

With interest rates near zero in the pandemic's aftermath,many are tempted by the yield pick-up offered by private debt,with estimated returns over a 20-year period of close to 9%,more than U.S. equity or corporate high-yield benchmarks,according to PitchBook data.

"They are doing it because conventional asset classes arenot giving the returns they have historically delivered," saidAndy Cairns, head of corporate finance of First Abu Dhabi Bank,the biggest lender in the United Arab Emirates, home tostate-owned investors Abu Dhabi Investment Authority (ADIA) andMubadala Investment Co, both active in private debt.

Many funds choose external partners to manage theirportfolios or invest alongside. Others, such as ADIA and nowQIC, also have in-house specialists. QIC's team will look afterthe origination, analysis and management of private debt,initially in infrastructure assets.

The operations will act as a source of financial stimulusfor sectors like infrastructure, real estate and companiesrebuilding after COVID-19, QIC said.

The asset class has grown from 2% of portfolios in 2015 to3.2% in 2020 among the top 10 state-owned investors, accordingto Global SWF, an industry data specialist. State-owned fundshave allocated close to $9 billion to private debt since thepandemic, according to its data.

"Sovereign investors benefit from lower liabilityconstraints that enable them to take on more liquidity risk thanbanks," Global SWF said.

Across all investors, fundraising for distressed debt andcredit special situations, such as for growth capital andbalance sheet restructurings, rose during 2020 to $37.3 billion,PitchBook data showed.

Qatar Investment Authority is generating strong returns on amulti-billion dollar bet it made on distressed debt, sourcestold Reuters last month.

So far, there has been little sign of investors beingburned, with no wave of payment defaults after the COVID crisis.Still, mark-to-market values for private debt funds fell duringthe pandemic's immediate aftermath.

"Early indications point to a modest recovery in subsequentquarters, but the full extent of the damage to portfolios won'tbe known until later in 2021," Dylan Cox, a private capitalanalyst at PitchBook, wrote in a research report.(Reporting by Tom Arnold in London and Saeed Azhar in Dubai;editing by Larry King)

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