Many investors access the market via managers affiliated with large insurance companies. In this paper, we explain why we think non-affiliated asset managers get to see more transactions, and can tailor portfolios that are better aligned with investors’ specific needs.
- We believe Private Placement Debt has three major advantages over public markets:
– Greater diversification: Corporate issuance is complemented by significant project finance, infrastructure, real estate debt and asset-backed issuance.
– Higher risk-adjusted yield potential: Typical liquidity and complexity premiums can generate significant additional spread relative to comparable public credits.
– Enhanced downside mitigation: In the small number of historical defaults, investor-friendly covenants and other protections are associated with higher rates of recovery relative to public bonds.
- We view Private Placements as a natural buy-and-maintain asset to match the long-dated liabilities of life companies, pension plans and endowments, but the yield pick-up makes them potentially attractive to many other types of eligible investor.
- Allocations remain relatively modest, on average, even for the life insurance investors that have traditionally dominated the market; considering Private Placements as an extension of investment grade credit portfolios could incentivize larger allocations.
- In our view, accessing the market through an independent asset manager, rather than a manager affiliated with a large insurance company, brings considerable advantages.
– An independent manager needs to put less capital to work: It may be better equipped to consider smaller, more complex or more idiosyncratic transactions.
– An independent manager is not buying Private Placements for its own balance sheet or liability-matching needs: It can dedicate itself to sourcing paper that is better aligned with investors’ specific needs.
- We believe now is an opportune time for all types of eligible investor to consider Private Placement Debt for their portfolios, and to reconsider how they access this market.
Source: Public: Bloomberg (Single A and BBB Corporate Indices); Private: Bank of America. Data for March 2020 is excluded due to the short period without private market transactions during the initial implementation of worldwide COVID-19 restrictions. For illustrative purposes only. Historical trends do not imply, forecast or guarantee future results.