In the pursuit of long-term portfolio construction solutions, institutional investors are increasingly turning their attention to the private debt asset class, says David Sum, director of the alternative income group at Ninepoint Partners.
“Looking ahead, we believe the current high interest rate environment and liquidity constraints from banks and the syndicated market creates a favourable dynamic for established private debt funds to originate deals,” he says. “In a tight-liquidity environment like we are seeing now, lenders have a greater ability to command enhanced deal terms, including lower leverage ratios and better debt coverage metrics.”
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In a study published earlier this year, Ninepoint Partners noted increased exposure to private debt among Canada’s largest pension plans. The Canada Pension Plan Investment Board had invested $44.4 billion in private debt as of Dec. 31, 2022, representing a 25 per cent increase from the previous year. Similarly, the British Columbia Investment Management Corp. increased its private debt investments to $13.5 billion, thanks to an additional $4.7 billion allocation at the end of its fiscal year on March 31, 2023. This represents the largest amount invested into the asset class by the BCI since it started investing in private debt five years ago.
Last month, two of Australia’s largest pension funds — the AustralianSuper and the Australian Retirement Trust — reported increased allocations to private debt, both domestically and internationally. Combined, the two funds hold more than $20 billion in private debt investments, according to a report by Reuters.
Despite this noticeable trend, experts see a longer road ahead for Canadian institutional investors when it comes to private debt investments, particularly when compared to their peers. “Canadian institutions remain relatively under-invested in private debt relative to their U.S. counterparts, despite all these headwinds,” says Ramesh Kashyap, managing director and head of the alternative investment group at Ninepoint Partners. “Overall, we believe that allocating five per cent to 20 per cent of assets in a portfolio to private debt with a long-term view can help generate income and better diversify portfolios.”
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