Multi Private CreditMaking the benefits of private credit accessible to all institutional investors
Long term - Liquid
Private credit offers an illiquidity premium compared with publicly-traded fixed income asset classes and equities
Solution - Innovation
For institutional investors looking for attractive levels of income it’s an effective part of a cashflow driven investment (CDI) solution or can be used as a complement to or replacement for a growth strategy
Low governance - Hub
UK institutional investors can access different private credit asset classes within a single low governance solution
How can UK institutional investors benefit from private credit?
Private credit refers to any credit instrument which is not financed by a bank and is not issued or traded in an open market. It also means it’s non-sovereign as in not-guaranteed by any State.
Private credit asset classes include:
- Infrastructure debt
- Direct corporate lending
- Real estate debt
- Specialist credit such as royalty backed lending, litigation and trade finance
With loan terms from 3-8 years, these asset classes work with fixed or floating rate interest rate payments and are diversified across the US and Europe.
Advantages include attractive yield pick-up, risk management, and diversification
Private credit has the potential to offer an illiquidity premium compared to publicly traded fixed income asset classes, so available yields can often be higher than public fixed income asset classes. It also has historically lower average recovery rates than equivalent rated public corporate bonds. And with historically low correlation to more traditional asset classes, it offers strong diversification benefits.
Most investors, whatever their size, can access multi private credit strategies
In the past, smaller institutional investors couldn’t access privately structured credit funds due to the high minimum subscription thresholds, but we’ve made this possible through a single pooled multi private credit solution.
There’s also the benefit of lower governance. Allocating and investing in many private credit asset classes takes a significant amount of input – but a single multi private credit strategy can reduce it substantially.
A one-stop solution that increases overall portfolio diversification
We bring all our investment capabilities and expertise across a range of asset classes into one innovative pooled solution – managed by asset class experts in Schroders Capital, our dedicated private assets business. This solution uses the full range of their specialist internal capabilities along with best-in-class external manager funds providing manager diversification. The portfolio combines corporate direct lending, infrastructure debt, real estate debt and specialist credit across US, UK and Europe into a single lower governance solution.
Why multi private credit for UK pension schemes?
“Investment options within the private credit market have expanded rapidly in recent years as the proposition of enhanced return with strong downside protection and low loss ratios has appealed to many investors. We believe UK institutional investors should take advantage of private credit’s diversified cash flow streams, supported by non-correlated underlying collateral.”
Senior Investment Director Private Equity
Key Investment Risks
Volatility risk: The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Liquidity risk: There may be very limited liquidity available via the secondary market of the proposed Fund given the underlying private credit assets and investors should consider an investment only if they intend to hold it for the life of the proposed Fund. Liquidity of the underlying investments might not be sufficient to meet investor subscription and redemption requirements.
Interest rate risk: A rise in interest rates generally causes bond prices to fall.
Credit risk of underlying issuers/lenders: A decline in the financial health of an issuer/lender can cause the value of its bonds/ loans to fall or become worthless.
Currency risk: The fund can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Counterparty risk: The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the proposed fund, potentially creating a partial or total loss for the proposed fund.
Derivatives risk: A derivative may not perform as expected, and may create losses greater than the cost of the derivative.
Concentration risk: The proposed Fund may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the fund, both up or down, which may adversely impact the performance of the fund.
Gearing risk: The proposed fund may borrow money to invest in further investments. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Valuation risk: The underlying private credit assets may be subject to inadequate pricing reliability. In addition, property-based vehicles invest in real property, the value of which is generally a matter of a valuer’s opinion.
Industry/country risk: Legislative changes, changes in general economic conditions and increased competitive forces may affect the value of investments. Additional risks may include greater social and political uncertainty and instability and natural disasters.
Infrastructure asset risk: Infrastructure assets expose investors to additional risks, in particular construction risk (e.g. construction delays, cost overruns, etc.) and deployment risk (e.g. capital being deployed in several instalments during construction period rather than upfront for brownfield investments).