Alternative assets have been one of the winners of the banking crisis, which marks its tenth anniversary next year.
The low return environment that has blighted more traditional fixed-income assets since the global financial system almost collapsed has sent pension funds on a quest for a bond proxy. The search for predictable and adequate cash-flows ultimately put non-investment grade credit into the spotlight.
In the 10 years to 2016 that followed, the global private debt market increased four-fold to $595bn, according to Preqin, while assets under management expanded by 7.1% in the first half of 2016. It is understandable why institutional investors have warmed to areas such as syndicated loans, direct lending and structured credit, assets that were once considered niche or the domain of the banks.
The returns could be higher than the 1.2% yield offered by 10-year gilts in November, with insiders claiming that senior debt could return 6% to 8%. More illiquid assets, however, could generate returns of up to 12%.
Alternatives to government debt and high-grade corporate paper is a diverse universe populated by various asset classes, risk profiles and regions, all of which help with risk balancing of portfolios. Another plus has been that institutions have filled a void created by the banks when they retrenched to their more traditional markets following the crisis.
These returns, of course, come at a price. Some of these products are complex, while investors could face pressure from holding illiquid or leveraged products. However, low default rates, attractive durations and higher returns mean that these markets could remain an institutional asset class, even after yields in lower risk investments improve.
To discuss these issues we bought together a trustee with an asset manager and consultants to discover where the opportunities lie in what is a complex sector and if the rewards really are worth the risks.