The $10 billion Vision Super fund is slowly starting to allocate capital to private credit, joining other institutional investors including Mercer who are looking to shift some money out of the equity market.
Vision Super’s market strategist Stephen Nash said buying “well secured loans that earn a good risk premium” seemed “appropriate” at this point in the cycle. He joins Mercer’s portfolio manager Sue Wang who has been selling global equities in their growth diversified portfolio to allocate more money to private credit.
“We are looking at debt more than we had for quite a while so that is quite a bit of change for us,” Nash told delegates at Investment Magazine’s Private Credit Forum in Melbourne. “Other funds are doing the same. We have had a great decade for equities but we think the next decade won’t be as good and that will naturally mean a more prominent role for debt relative to equity.”
A recent McKinsey & Co report showed private market assets under management grew 10 per cent last year to a new record of $6.5 trillion as investors continued to shift capital from the public markets and fund managers looked to raise more money. The report did show, however, that private debt fundraising softened for a second year, falling 11 per cent in 2019. Even so, fundraising for the asset class still surpassed $100 billion for a fifth consecutive year.
Nash said Vision Super was “gradually bringing (capital) over” to help diversify the portfolio in the event of a downturn. He also said that it was an easier asset class for his investment committee to understand than other diversifying strategies like alternative risk premia which they had used in the past.
“If we were in the wrong part of the cycle and we did get a large recession then there will probably be a lot of spread to be had,” he said. “We will take advantage of that at that point but I don’t think it’s appropriate to get super aggressive at this point.”
He said on the sidelines of the conference that progress was also slow due to the unwillingness of banks and private credit managers to share their data to help create an index.
Mercer’s Wang said while Mercer has had an allocation to private credit since it created a dedicated fund for its Australian clients in 2014, she convinced the board last year to increase its strategic asset allocation to 5 per cent from around 1.7 per cent. She added that her team was still in the build-out phase and were looking to add managers and new strategies.
“Its job is to diversify other risk assets in the portfolio, not to be defensive in the event of an economic downturn,” the portfolio manager told delegates. “The only way I could get the 5 per cent allocation is because I’m putting it in the growth part of the portfolio. We are deallocating out of global equities to do this.”
She also said that given the significant amount of equity risk in all of Mercer’s client portfolios, anything that helped diversify the growth part of the portfolio was “helpful.” She said while the fund was global in nature, it would retain its Australian bias with between 40 to 50 per cent allocated to local debt. They’ve also started to look at Europe and do some co-investment deals, partnering with managers already on the book.
More sleep at night
“This is the part of the portfolio you need to worry about the least,” she said. “If you have chosen the loans correctly, if they are non-cyclical type loans, they are actually going to be benefiting in some cases from a downturn. If anything this is the ‘more sleep at night’ portion of the portfolio.”
Nash said Vision Super would likely stick with the Australian market for the time being. He said the fund was “happy” with their global high yield credit exposure but they wanted to take advantage of the inefficiencies in the local private credit market before going global.
“Over the next five or 10 years it’s going to get really sophisticated (in Australia) and we will need to do a lot more work on it,” said Nash. “We are at the initial development of it and it’s quite a big change that is occurring with the banks backing off. It’s quite an interesting time to be looking.”