Investors, consultants, fund managers and academics came together at the portfolio institutional alternative credit conference last month to discuss opportunities and risks within long-term debt.
“We talk a lot about the illiquidity pension funds are prepared to take and assets may appear liquid now, but when the shit hits the fan, will they really be liquid?”
Andrew Jackson
Nature abhors a vacuum, as the old saying goes. So, it seems, do the financial markets.
The appearance of private debt in the portfolios of a growing number of UK investors is due to both the ceaseless search for yield, but also the deleveraging and large scale exit from the market of the traditional lenders: banks.
With the banks no longer lending the sums they once did, it did not take long for asset managers to devise ways of allowing institutional investors to fill the void. On paper, it seems like a perfect fit: private debt provides the lender with a stable, long-term income flow. But illiquidity comes with the territory and investors need to know what they are allocating to.
The portfolio institutional alternative credit conference saw asset owners, consultants, academics and asset managers come together to discuss the risks and rewards of this often complex area.
Shadow banking risks
The half-day conference started with an economists’ debate and a strong warning of a potentially major market crash as a result of opaque alternative credit such as shadow banking. Michael Dempster, professor emeritus and founder at the Centre for Financial Research, University of Cambridge said he was particularly concerned about the practice of shadow banking in China and its potential effect on the world economy.
He said: “I don’t know when [it will happen] but the danger is increasing. If China has an economic failure then the rest of us will be in the soup.”
Capita Employee Benefits chief economist Albert Küller also warned against pushing innovation too far in the alternative lending space. “The behaviour is the same, it is the instruments which change,” he said. “If we see too big a shift to alternative lending then we might see quite a big shift in the economy.”
However, Küller added that historically credit crunches had usually been worse when banks dominated the lending – for example the credit crunch experienced by Japan in the 1990s – and so the creation of a more diverse universe of lenders could be a positive development.
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