By the way, see, one word really across this whole podcast, it's alignment.
The alignment of interest is critical, so making sure bad loans are being issued is
“paramount importance, and that's what we don't see, the same parallels going back to”
the GFC. Hello, and welcome to OneAion. Aion's global podcast that explores the top issues affecting businesses around the world. With each week focusing on either a risk capital, human capital, industry, or global topic. This week it's the turn of our global insight, which looks at the big geopolitical, economic
and regulatory topics impacting businesses. And today we're looking at private credit, an issue that's currently making financial news around the world. Exploring this topic are Ari Jacobs, Global Head of Investment Aion, Rustyving Jack, Global Chief Investment Officer of Aion, and Allison Rusty, co-head of UK Elinga Fixing Room at Aion.
Together they look at what's behind the headlines and what actually matters for investors. Hello and welcome to this global insight episode of the OnAion podcast.
“I'm Ari Jacobs, the Global Head of Aions Investment Practice, and today we're taking a closer”
look at private credit, a part of the financial markets that's receiving a lot of attention to the right now. Help us unpack what's driving the headlines and what actually matters for investors. I'm joined by Rustyving Jack, our Global Chief Investment Officer, and also Allison Rusty, co-head of UK Elinga Fixing room at Aion.
Rustyving brings a global asset allocation portfolio construction perspective while else and works closely with our clients across the UK Elinga, and can share what she's seeing in those markets. So first I'm going to start over with Rust and do a little bit of an education, a background on private credit.
Maybe tell a little bit about where that matters within Aion's portfolio and why we're positioned well to lead this conversation. Rust? Great, thanks Ari. And we just remind the audience to what Aion investment does.
So when we work with over a thousand clients globally, we have a thousand clients in Aion investment assisting clients at all types of matters, from asset allocation to manager selection, the portfolio implementation. We advise over four trillion dollars in assets globally, and we have what we call the outsource
chief investment officer business where we oversee over a hundred and sixty billion dollars
of clients assets under discretionary basis. We will over a hundred colleagues dedicated to researching the markets, investment managers, and implementing portfolios that covers public and private equity, public, and private credit, real assets like real estate infrastructure, and hedge funds, and diversifying strategies. So we've covered private credit for decades, really it started off with things with much
more opportunistic credit to step credit, moved into direct lending that is lending to private equity owned companies as the primary definition is that it is then expanded to asset-based finance, its real estate credit, its strategic risk transfer, so many of these areas that else can covers on the day-to-day basis. And the final thing I'll note Ari is that on a quarterly basis, we review over 20,000 strategies
quantitatively, and our team is meeting with over 3,000 investment managers each year to make sure we have a full view on the marketplace in terms of what's going on and what we expect to go on in terms of what's our clients are invested, as well as trends that we would expect to see as markets evolve.
That's incredible, right?
So we have a great breath to have this conversation here today, maybe I'll send a last good to give a couple of introductory comments as well from the UK and me, a perspective.
“Yeah, I think we've been advising and researching private credit here really since it was”
a nascent asset class, particularly true in Europe, where it really only merged for it in the financial crisis right where it was called back from lending and private capital stepped in to fill that structural gap, we've really watched it evolve from that emerging market to really sort of tune trillion and market is today, and it really now, it largely mirrors public fixed income markets, both in its breadth and size, so I think that's
quite important to remember as we've found the discussion that really private debt is now just a core part of capital markets, and it's also, I think, must touch on this, but we're seeing this convergence now across public and private fixed income markets, so I think we see against this backdrop, it's really going to take a flexible approach focused on the outcome and being able to take that flexibility to a cost public and private for the best
relative value, so it's why we've structured our research team A on that fixed income
Covers that full public, private spectrum, rather than set for teams, so that...
that relative value.
Great, and so important to know how this has become such a part of the market, so maybe
we'll spend a couple minutes rust and owls and just unpacking a few phrases and what level said on what private credit really is, and I think it's a very, maybe overused statement of times as to what it is and isn't, and maybe you could spend a few minutes educating the listeners on what private credit is rust? Sure, thank you, Arden, so we'll start with with the public credit, that is debt issuance
by organizations that is available really to the broad marketplace, so it is fundraising by a company, by government, or even back mortgages on individuals' homes, so that those are the main parts of the public fixed income markets. The difference we talk about private credit is usually that is a much more subset of a power going to a group of lenders or a single lender to meet their financing needs, and that's
why I mentioned before in private credit, it is we call direct lending, so that is primarily two companies, most of those companies are private at we own, but there's also asset-based finance, so that's airplane lease is real cars, consumer debt, real estate credit, but it is a vast marketplace, and what I like to say is it's lending, whether it's public or private, what you're doing is you're making a loan to an entity, you're expecting to earn interest
“and receive your principal back, and that's why we look at the marketplace very broadly”
and what's the role of both public and private credit and our client's portfolio is. Private credit is primarily used for diversification and additional return, because you do expect an yield that is higher than public credit markets, because you are taking on illiquidity risk with private credit, so it's not easily to transact like you can with a corporate debt or government debt that is tradable really minute by minute.
That's right, so we're going to unpack a few of those items in the next few moments, but also maybe add to that as well as how your clients and the UK and the media are using private credit and their portfolios.
Yeah, sure, taking a step back when we first started invested in private capital here
for 15 or so years ago, I interest rates when they're zero, so it was a really obvious why you might look to get this yield to pick up some investing in private credit at the
“time, and that's how a lot of clients saw it as a extension of their fixed income portfolio”
moving into giving up some liquidity as must touched on for a yield pick up, I guess over time that has evolved into border, so we stayed debt, we've been really active in the credit risk sharing space, for example, and asset base lending as well. Yeah, I'm so glad you brought that up right, it's certainly a key theme that we hear today and are focusing on related to bringing the private markets to such a wide range of investors
in the UK and what you're doing out to have some similar discussions we're having here in the US, so it's an important theme that we keep talking about. But I want to make sure that we discuss here why private credit is so much in the news
right now, maybe first from what we're reading in the US, and then as well, we're reading
in the UK and in the media, so talk a little bit about what's in the news or we're hearing what we should see through what we should understand when there's all this private credit thematic discussion out there, Russ? Yeah, it is very topical, it is, and so first and foremost, the last decade plus, we've seen private credit grow tremendously in size, and really a niche area of the marketplace
where it mainly banks providing financing to private organizations, to private credit going to trillions of dollars, and it's both investment-grade and non-investment-grade, and it's in the headline today, because for quite a while, if this area group people are saying there was a private credit bubble, like you can't continue to grow at this side at that same rate.
Then you throw in what we call the SES POCK ellips, which is, well, AI and software companies all together that you won't need any software, and then the redemption, and that is where there are a significant our redemption related to private credit funds, whether it's a, we call a business development company or VDC, or interval funds, and interval funds is a way for really the masses to access the private credit marketplace, and it has been
a heightened level of redemptions.
“Now, what you need to understand in many of these cases, these funds have really the obligation”
to pay out a limited amount of the redemption, typically for an interval fund, it's 5% of the net asset value on a quarterly basis. Now, redemptions have been much more, they've been 10% to 15% in a couple of cases, investors asking for their money, and the sponsor of those funds have paid up between 5% and 7% of those redemptions.
So, the press likes to make note of, oh, they're not paying out the full redemption
Amount.
We're happy to see that the fund managers are following the rules and regulations, because
“you have to act in the best interest of all investors, not only those who want their money”
today, or some of them money today, but those who are long-term investors, and you have to look at those provisions that really protect all investors in those funds. So, the headlines in one by every day is manager A's limiting redemptions, manager B's limiting redemptions, and the amount of redemptions. So, they're really trying to create somewhat of a run on the bank.
When we don't see this as an issue, they're meeting their obligations as for the regulations. I think that's so important, Russ, because we're going to press full of times, pick up on that, but these investors who went into these funds, they were well aware of these redemptions, I'll call them limitations, or five or seven percent caps. This is not new.
This was always part of the fund structure.
Is that correct? That is correct. And so, whether you knew it, or you didn't know it, if you didn't know it, you should have known it. So, it's really enforcing the mechanism of the marketplace.
Yeah, I don't actually add to that. I feel that the industry has grown up, because obviously, around through the financial crisis, and you saw these open-ended sudden structures with the quality and asset, liability mismatches, and they perhaps didn't have these gates in place or mechanisms, and that created issues.
“So, I think now, the way that this evergreen funds are being structured, is a much more”
robust structure, and yeah, that's Russ's touches on it, it isn't sure being that they
can meet the liquidity that provided.
The themeatically, Allison, is there anything different in the UK or a media that we're hearing as compared to some of the press that I just discussed in the US? No, it's actually a very similar narrative. I think a lot of focus towards the end of last year, and early this year, was around the software exposure and AI disruption.
It's again, but then it's about looking through the headlines, because we did a check, I guess or not, managers, and if I think of our direct link with the managers, for example, most head about less than 10% exposure to software companies in their portfolio, and then even then, when you look through, they're not all similar, right? So, you could have a medical diagnostics of where companies that's in a highly regulated
market, that's going to have a much less likely AI disruption than maybe a translation service company. So, it's looking through to even that software exposure, which is a higher risk from the AI disruption as well. That's great.
So, how else have let's say on the path of view for a minute, let's talk about how we're
“discussing this with our clients, are they asking a lot of questions, are we changing?”
It's automatically the way we're looking at our clients investing, and maybe in that take a little bit into the LTAF, so you mentioned before. Yeah, I mean, it's definitely, as you say, like, FT headlines every week, and they're definitely getting questions from clients who just want some comfort around either their private credit exposure that they already have, or if they're looking at it as a new investment,
we published a paper last week, just trying to address some of our thoughts around this and to answer what those concerns could be. But actually, I think what's interesting is, probably actually just seeing more increased activity and looking at private, free space in general, we've also touched on this. Again, it's interesting because I had a client meeting a couple of weeks ago, and I think
their perception was, well, these are just lower-quality companies that are thanks on lending to. And it's interesting, actually, no, to last his point, an investment grade company could just as easily use private capital markets for some of this debt. And so we've seen that where, obviously, we've had a benefit of all in yields, and public
fixing comes, but in pretty attractive over the last few years, but that's getting tighter. And so we're starting to see the trend of clients in the investment grade space, seeing a private market as a fixed income replacement or extension, and that's the sort of point we said at the beginning about this public to private, it's looking at it in its totality
of the fixed income portfolio, whereas I think historically, we probably would just talk about private debt as a separate private market sound occasion, so I think that's evolving. Great, Russ, what would you want to add to that?
The key thing is the manager selection, knowing how they source the debt, what they're
underwriting standards, or how they put portfolios together, and then the vehicle you're investing in. So those are absolutely critical. We've always emphasized manager selection is really the key factor of having a successful private credit program.
So, Russ, you've done a great job of educating our clients and our colleagues across the practice both on the research side, on the client-facing side, about what this is and what this isn't. The conversation you and I have is this 2008 all over again. Should we be worried about this in some kind of systemic way, and if so, or if not,
what red flag should we be looking for? It's a suggest that maybe there's something really big here, help us with that, Russ. It's a great analogy, and everybody likes to bring up the great financial crisis of 2008 relative today. So we do not believe this is anywhere near what's going on with the GFC in 2008.
There's a couple of important things to really point out.
First and foremost, if you go back to the early 2000s, there was an strong incentive for
the debt issue, and sure it's just to get the debt out to door. A source debt get out to or it didn't matter what the quality was. There was not an alignment of interest, so the marketplace is adjusted tremendously a lot of it to a regulation, and to when our clients invest in private credit, they're hiring a manager who's acting on their behalf as their agent, and one of the key things we look
for is alignment of interest, so one, they have to serve a client as well. We see them as fiduciaries, second, they're putting them on capital in the same bonds, private credit issuance as alongside our clients, so alignment of interest is key, if I'd say one word really across this whole podcast, it's alignment.
The alignment of interest is critical, so making sure bad loans aren't being issued is
“paramount importance, and that's why we don't see the same parallels going back to the”
GFC. GFC loans were just going up to the left and right, it was not with regard to credit quality, we have high regard for the managers, we recommend it to a clients that they are making sure they're lending to good companies and they're making good loans, and same time they have their own capital in business as at risk.
Nelson, your thoughts on that? Yeah, I think it's interesting because private credit almost was a result of trying to address some of the systemic risk with banks for the financial crisis, regulation force banks to pull back from lending and private credits emerged, but I think it also was interesting that is, if you think about it and the rest is touched on this, but private credit funds,
they're largely fully funded, some investors capital, if they do borrow, maybe it could be 10 to 30%, it's usually a kind of revolving credit facility to smooth out the investment period rather than long-term leverage, if you compare that to banks who probably have
“what 10% of capital or net balance sheet, it's actually, I think, quite positive for the”
private debt that it doesn't represent this systemic risk as it were that you saw with some of that banking industry as well, I mean, yeah, I'd totally agree with Russ' point on the manager research side, we think we've got a very robust approach to how we identify managers that we think will be successful, and as Russ says, there's that alignment there, and ultimately, the investment industry is difficult, right, if you underperform and you're
doing poor underwriting, you have losses, you're very quickly not going to be having an expound in the market, there is that incentive for the managers to keep up their robust underwriting, and just even if there's more competition notes as it's raised. That's great, and look, a lot of head nodding here, as the three of us are talking about this and important themes that we're trying to share in the market and with our clients,
especially, so maybe Russ and Allison, I'll just ask you to close with any key takeaways from how you're talking to clients portfolio, extraxure, allocation standpoint, just to love some of the last key takeaways from you, Russ, you first, please.
The key takeaway is, so we are very constructive on private credit.
“We see this as a secular trend, that's why we have private credit to sit along our public”
credit analysis, and it really is critical to look at all aspects of the credit marketplace. We like the diversification that is a current private credit over the past several years, so the diversifying portfolio is even more that pick up a meal is essential, and the other thing is the vehicle innovation, managers providing different types of vehicles, broadening the set of investors who can access private credit has really been a win for all
institutional investors, and I'll finish with a alignment of interest in critical and manager selection is critical in order to deploy really a high quality portfolio across both public and private markets. Also, yeah, I'd echo Russ' points, and I think, yeah, as I said, we're seeing increased amount of costs. I'd all different of our client basis, why we've got insurance clients,
maintenance and foundations, especially now that we've got, you know, these evergreen evolution and structures with evergreen coming forth is just allowing different access points to this private markets, and to Russ's point, this is a structural shift to market, so private debt will continue to provide that. Great, Russ and Allison, thanks so much for helping bring some clarity to this really complex
topic that's attracting a lot of attention these days. That's it for today's global insight episode on the on-a on podcast. In the weeks ahead, we'll continue exploring how geopolitical regulatory and market developments are shaping the business and investment environment, including a deeper dive into credit solutions for Russ' capital perspective. Until next time, thanks for listening.
Thanks for tuning into the latest episode of On-A on. If you've enjoyed this episode,
Don't forget to subscribe wherever you get your podcasts and be sure to visit
Aion.com to learn more about Aion. We'll be back next week with another episode,
“our risk capital insight, where we'll be looking at another side of credit,”
specifically credit solutions for the global energy industry. This content is for informational purposes only and is not an offer or a solicitation.
Reliance upon information in this material is at the sole discretion of the listener.
“The views and opinions expressed in this podcast are for educational purposes only”
and do not constitute investment, legal, tax, or other professional advice. They are not an offer or solicitation to buy or sell any security, fund, or investment product.
The information provided in this material is not intended as a complete analysis of
“every material fact regarding any country, region, market, industry, security, or strategy.”
Statements of fact are from sources considered reliable, but no representation or warranty is made us to the completeness or accuracy. Diversification and asset allocation does not ensure profit or protect against loss. Private credit is not suitable for all investors and any allocation should be made only after carefully considering investment objectives, time horizon, liquidity needs, and risk tolerance, and consulting with appropriate professional
advisors. AONPLC is a large diversified professional services company and as such services are provided through indirect subsidiaries and affiliated entities. For the purposes of this podcast, AON investments collectively refers to the various AONPLC affiliates which provide investment advisory services in jurisdictions worldwide. The AON investment manager research and strategy consists of investment professionals from global advisory affiliates who contribute to investment manager and asset class
research. The research generated by the IM and R team is shared among AON's investment advisory affiliates. The views and opinions expressed in this episode are those of the speakers and may not necessarily reflect the views of AONPLC or affiliates.
