As global private debt investors increasingly turn to Asia, a relatively underdeveloped market in the space, a top executive at Dutch investment firm NN Investment Partners believes that the region’s private debt appetite may not be large enough for investors yet to make dedicated allocations.
“The appetite is more on a deal by deal perspective rather than a portfolio allocation perspective. For Asia infrastructure, there are infrastructure REITs that we have seen, we have also seen loans but the market is not big enough right now for asset owners to make a dedicated allocation as a standalone asset class in Asia,” said CEO and Head of Client Group Asia (ex Japan) NN Investment Partners (Singapore) Gopi Mirchandani in an interaction with DEALSTREETASIA recently.
The firm, which is backed by Dutch life insurer and investment firm NN Group, manages $281 billion in assets for its clients. While it does not have a dedicated portfolio for Asia in the private debt space, it does have an exposure through its partnership with Dutch development bank FMO.
The NN-FMO Emerging Markets Loan fund is an impact fund that enables institutional investors to co-invest alongside FMO in loans to financial institutions, renewable energy projects and agribusiness companies in emerging and frontier markets. In 2017, the fund also received commitments worth about $100 million from Swedish occupational pension fund Alecta.
Mirchandani noted that the investment firm itself plays more in the European and US markets for loans and debt as it has not quite developed in Asia.
“When we talk about Asia, we really look to target the Asian institutional investors, the ones who have to invest globally. When they make asset allocations, there will be an allocation to private debt, especially in the developed countries,” she added.
Nevertheless, the interest in Asian private debt space has been growing over the last few years with overcrowding in the developed markets. According to a report from Preqin, in 2017, the region’s private debt funds raised $6.4 billion which was the second highest total that year. Further, of the investors who expressed an interest in Asian private debt, only 12 per cent were local.
In an interaction with the portal, Mirchandani also talked about the valuations in the fixed income segment and fundraising challenges.
How big is your private debt strategy?
In terms of private debt, it is very Europe and US focused, so the market for loans and debt has not quite developed in Asia. But it is fairly developed in the US and Europe. When we talk about Asia, we really look to target the Asian institutional investors, the ones who have to invest globally. When they make asset allocation, there will be an allocation to private debt, especially in the developed countries.
A lot of institutions are still coming up with private debt funds or strategies for Asia even though we agree that it has not taken off yet like in the European and US markets.
I think as it is right now, the appetite is more on a deal by deal perspective rather than a portfolio allocation perspective. For Asia infrastructure, there are infrastructure REITs that we have seen, we have also seen loans but the market is not big enough right now for asset owners to make a dedicated allocation as a standalone asset class in Asia.
If you are an asset owner looking to try to improve your fixed income bucket, then you would be looking at infrastructure debt or a means to pick up more yield. That is how I see it right now. If you are a sovereign wealth fund, you will have dedicated asset allocation to mezzanine or equity. Being insurance backed, the synergy that we see most is with clients.
Currently, we do not do it in Asia specifically but with FMO, we have invested in the portfolio loans space in the emerging markets but nothing specific to Asia.
Do you have a plan for a dedicated fund in future?
We are of the perspective that the addressable size is not that big enough for us. We are not in the private equity space, it would be fairly attractive for endowments or family offices in that space. The play we have is in insurance clients because our background is insurance backed. What complements us very nicely is wealth management solutions or yield solutions. As part of that, we can play in the credit spectrum.
What is your mix like for equity, fixed income and multi asset?
Two-thirds is fixed income and equity and multi-asset are the rest. We are very fixed income focused.
In the region, what is your view on valuations and for those who are now looking at exposure in Asia, what would you say?
From a fixed income perspective, when you look at a comparison of risk-adjusted returns for Asia vs the US or Europe, for example, and Japan, I think Asia is a fairly good pick up in terms of yields with the same risks and shorter duration. Since Asian fixed income is very much a regional allocation, there is still a lot of value to be uncovered in that space.
Are there any pockets in the region — countries where you see more value or opportunity?
Currently, in Indonesian high yield, there is a lot of value, in China too, which is a very big market. People sometimes avoid it for its credit risk but if you are sensible enough and can do your research, there are very good names you could pick up. From our performance perspective there was a risk and we were able to outperform peers.
You are also engaged in some senior debt too. Are these deal specific?
We look for it more like portfolio, so we have senior debt in infrastructure and senior debt in real estate and these are mostly European.
What is it that would take most of your attention this year?
I am a fundraiser and with respect to raising money in Asia, marketing is quite a difficult thing. We are moving from traditional media to digital media and with respect to digital media, it is difficult and the bandwidth is short. The challenge actually is conveying the right message with conviction with digital media and finding ways to do it. From our perspective, it is a very competitive market and that is less to do with budgets and more with the conviction of the message.
The mind-share that people have for serious messages is very short, so how do you develop it in a succinct way that it conveys a message for social media and results you being a thought leader for something? Our target audience is Asia-based institutional investors and private wealth.
How does your fundraising process go? Is it a cohort that you raise or an ongoing process for a pool of funds?
We generally look for profitable assets under management and the relationships we have are mostly long term relationships. When we land a client, it is never for a deal but for a longstanding partnership. We have a whole suite of products and they are open-ended funds.