 Goed afternoon everyone. Welcome to the CFA-VBA webinar on private debt, reaching academic evidence and investment opportunities. My name is Hans De Rijto en I'm the CIO of Pension Fund TNO and I will be the chairman for this webinar. Before we kick off, I'd like to thank a couple of persons for now. First of all, I'd like to thank Annemarie Mönig, executive director of the CFA-VBA for making this webinar possible. En, of course, I'd like to thank our speakers for today. We have three excellent speakers. To start with Pascal Bonny, he will discuss the academic evidence on private debt and Pascal's professor of practice in finance and private debt at Tilburg University, where he is also the managing director of the Tilburg Institute for private debt. Next to that, Pascal was the CIO of Remarco, Swiss advisory and securities firm. Next to Pascal, we have two speakers from Schroeders, Jerome Nehu and Natalie Howard. Jerome is the head of infrastructure debt and he will discuss opportunities in infrastructure debt markets and Natalie is the head of real estate debt at Schroeders and she will discuss the opportunities in the real estate debt markets. So today we have both the academic side and more the practice side. After the presentations, so we start with the presentations and at the end we will have the Q&A session and I would like to ask everyone to ask all your questions through the chat function that you find below in your screen. And when you ask a question, please indicate to which speaker you like to address the question. Anna-Marie, we'll keep track of the questions in the chat box and she will make sure that we will discuss as many questions we can at the end. We are with a big group. In case there's no time to answer all questions, we will do our best to answer all questions that are not answered during the Q&A and then send them back to you. We will discuss that also with the speakers for today and I hope they are willing to help us with that. So don't hold back on any questions you may have today. The webinar will be recorded since tomorrow we will send a link to our participants to access the recordings of the webinar and then you also will receive the presentations. The first presentation is by Pascal. I met Pascal I think somewhere at the beginning of this year and then I found out that apparently there was an academic institute that performed research on private debt and it was located in the Netherlands. So I was very surprised. We started investing in private debt. I think it was about three years ago. We made two investments in direct lending which we founded out of our investments in Huyield and we felt that direct lending has better risk return characteristics than Huyield. When writing the investment case for direct lending I noticed that there was hardly any academic research available and even on private debt in general. There was also not much academic research which is in sharp contrast with private equity which has a lot of empirical research. So against that backdrop I was positively surprised that we have an academic research institute in the Netherlands fully dedicated to academic research on private debt and I'm quite sure there's a great need for that. So Pascal may I ask you to take over the screen and share with us your views on private debt from an academic perspective. Yes Hans, thank you very much to invite me to this CFA, the BA seminar webinar. It's an honor and a pleasure to talk to your esteemed members. It's true that in sharp contrast to private equity there is not much about private debt research. So we hope to fill this gap and as I have received a time slot of 30 minutes I will try to be very precise and fast with my introductory slides. Let me see whether I'm able to change that. Yes, exactly. So we are going into four or five minutes slots basically. I want to warm you up a little bit for the private debt topics and kind of given introduction. As you might have observed on the listed private debt asset managers since the COVID-19 losses and the market sell-off they have basically tripled their market capitalization. So if there is anything like market information and share prices I would say there is something going on in the private market space. We want to turn then on the second topic which is the return to private debt funds. There is some empirical evidence on IRS multiples and public market equivalents especially I want to shed light on whether or not private debt funds outperform the market and if so which markets they do outperform then I want to give you some other risk and return information on the private debt asset clause as a whole and layouts and research topics of our institutes. In total that should not be more than 30 minutes so I will be very fast if you have questions please note them as Hans said in the chat and we can come back to those questions. As Hans also said I'm working for Remoco which is a buy side advisory firm on illiquid assets and an advisory firm in various other topics but now focusing on the asset management side on the buy side advisory to institutional investors. We are a member of NEXTA, NEXTA is represented globally with 34,000 employees so we do have a global reach but most important for today is Tilburg University's activity and research in the private debt space for those of you which is unlikely that do not have information of the Tilburg University rankings. I listed them in the presentation so I think we can say that Tilburg is a quite accepted academic institution of much more than that. You have read or I hope you have read in the financial times over the last 24 months many articles on private debt. What you might have seen in these articles it is two things. First there is a big debate around private debt lenders or non-bank lenders as against bank lenders and what they do and why they do it, whether the shadow banking system as they call it in the media is a good thing to have or a bad thing to have or what the risks pertinent to it are and it continues with like a debate about private versus public markets. This is according to financial times the battle to watch which I agree very much in this title. It is a big battle to watch and it looks like it is also a very interesting battle to watch. What we have seen in the last two to three months is that there are really large funds coming to the market. One of them has just raised 11 billion euros into one into their latest European focused fund. So it's not the case that private debt funds are small entities or small structures. I'd rather say that private debt funds, at least the leading funds are quite big. The private capital industry as a whole has soared to beyond 7 trillion in assets on the management. There is an interesting article on just that fact in the Financial Times dated June 11 and I'd like to motivate you to read that article. It tells you a little bit about the institutional background why private capital might have soared to above 7 trillion over the last few years. So let's jump into this warm-up assets on the management breakdown. Here you can see that private equity, which is the blue bars, has relative to the other asset classes somehow lost market share. The top line here is 100% of all alternative assets in closed-end funds and you can see that private equity goes down from something like 80%, I would say, to below 70%. Why is that? Well, there are other asset classes taking some of that market and we are going to be talking today about three of those, let's say winners in the alternative space. One is real estate, I believe all the knowledge and topics to our real estate experts, not to talk about real estate today. The other is infrastructure, same for that and I will be focused on talking about private debts or anything else, everything else about real estate and infrastructure I will be talking on private debt strategies. If we look at this market, we have those for asset classes. I'm excluding from this picture the private equity asset class as this is clearly the largest. You will have the numbers in my presentation, which I think CFA is sending to you. So you can see that real estate, something like 1.2, infrastructure 0.8, private debt 1.1, 1.05, trillion assets on the management are somehow co-developing in this space. There is one category, which is a one asset class, which is natural resources, which is leveling off a little bit. But you can see that these through asset classes, and I think it's a perfect choice of the CFA, VBA association, that we talk about these three asset classes are really picking off, they are picking off somehow after the global financial crisis, and ever since then, they have been growing quite aggressively. These are the main private debt fund strategies. You will find Metronyne direct lending, distress debt and special situations funds in the market, then some more specialized subcategories like blended direct lending, unitron, direct lending, junior, subordinated debt, et cetera. But I would say you could focus on Metronyne direct lending, distress debt and special situations, which have these market shares, they also give you those numbers, which you will have in the presentation to have more detailed numbers. What is noteworthy is that within the last 10 years, from 2010 to 2020, as sponsors transactions are concerned, the private debt firm or the private debt capital industries, in general, have taken over or at least come to an equivalent role with banks. So here you see a chart that shows you all the sponsored private equity transactions that involved debt. And you will see that today, it is somehow a 50-50 game in the market, whereas 10 years ago, this was a 50-25% market share on the private debt fund side and the 75% market share on the bank side. So you could see as a general picture and introduction that private debt funds have taken some market share in the sponsored transaction, which is primarily M&A transactions market within euro. But if we compare the growth indexed to 2007, which is roughly the financial crisis, if we compare this growth of markets, even if they're on an absolute level much smaller, you can see that these markets have really outgrown the public market. So you can see in the blue line, that's the market cap of the multiverse total return index. So that's a double B on the index and also its capitalization. And you can see the FTSE overall index market cap. So the green light would be all private debt assets. And you can see that they outpace those markets, although the stock markets have had a very good phase in the market behind them. So you could say that, and it's really true, that private debt markets are much faster. They have somehow quadrupled their assets on the management in the last few years. So much more than the equity and the bond markets down here. If you look at BlackRock asset return expectations, you can also see that BlackRock estimates the direct lending in the street to return something like 9.3 percent on average. Very interesting. You also see the upper and lower bound as an interquartile range with 5 to 14 percent in returns. So an extremely attractive return profile from an independent, at least independent, from what I'm saying afterwards. Institute BlackRock, which is white knowledge, what I would say in the private markets. You see that only private equity has a 10-year estimation, which should return more to investors. You can also see that direct lending as an investment strategy should return much better returns than a 60-40 portfolio. I will come back to those numbers en put our own research into the context of the BlackRock numbers at the end of my presentation. Here is the current versus the target allocation of institutional investors of private debt in general in terms of their own assets on the management. So if we look at pension funds, they would have something like 2 percent private debt allocation in their portfolios as of today, and expect to go up to 5 percent, sovereign wealth funds, roughly the same picture, wealth managers, same picture, family offices, endowment plans, foundations. So in the cross section I would say the private debt relative asset allocation is expected to increase against traditional asset losses. Introduction to the GPs. I have a look at the size. This is capital raised in the last 10 years, so Oak Tree has raised 50 billion, GSO 43 billion, Goldman Sachs Group just for the private debt strategies, 34 billion, et cetera, et cetera. So you can see these large GPs just in terms of a size ranking are really large, so they would be raising something between 15 and 50 billion. En also the market concentration, which is a picture that we also see in private equity, is quite large, so the top 20 GPs have raised something like 40 percent of the whole market share. If we go into funds, I told you before that RS, here is the capital Europe 5, has raised something like 11 billion, so one fund compartment or one fund data structure, the larger funds start somewhere at 5 to 15 billion, which is quite large as well. Let's go to the largest investors in the world. You see many insurance groups, Manualive, Allianz, OXA. You see pension and retirement systems. You also see kind of advisors, Stepstone and Partners Group, which have their own advisory activity and are active in manager selections, public sector pension investment board, et cetera. They heavily allocate capital to the private debt fund industry, so the largest investors again will be between 10 and 30 billion. On the return, let me talk about a study that will be out to the market, out to the academic market in a few weeks from now. This study is done from Bilderberg Institute for Private Debt, together with Sophie Monigar from Flarek Business School and Fendt University. We look at basically two things. First, we wanted to provide a systematic examination of private debt fund performance, measured by several performance proxies, which I will introduce later. And we wanted to ask the question, do these GPs have any skill to outperform the markets or time the markets? I will focus on the return of performance measures today. As a second part, we'll need more time, but I can say something if there is time and room for questions at the end of today's meeting. The paper shall be made available to the webinar participants and sent out by the CFA association in maybe two or three weeks once it's out in the market. Short introduction to the sample. There are roughly 1,000 private debt funds in the market, starting in 86 roughly until 2020. And we have had a chance to look at the cash flow data. So we do have timed cash flow data for something like 450 private debt funds. We believe that this is a pretty representative of the overall private debt fund market. It makes up for approximately 50% of all funds. And if you went by size, it will make up for certainly the larger funds in the market and represent a very large fraction of the industry. What you can see here is that the average fund size goes to 1.3 billion. This is kind of very large. You can also see that it is still a very much US dollar-based business. 85% of all funds are US dollar-denominated. Only very few, like 12% are euro-denominated. And also in terms of geographic focus of those funds, 80% of that business is still US focused. Also interesting, these funds need something like three years on average to deploy the capital. So if you sign up and commit capital to a private debt fund on average and differing from strategies to strategies, you will have a three years capital deployment period experiencing capital calls and capital allocation in the market. After like one and a half years on average, half of your capital can be expected to be deployed. We looked at these three multiples, IRR investment multiples and the public market equivalent. As you all know, IRRs are somehow problematic to take as a performance measure, especially in the private equity and the private debt fund industry. IRRs are typically upward biased as very early cash flows affect the IRR calculation, given the reinvestment assumption of a typical IRR formula. We will show IRRs, of course, to make those benchmarks. Then we take the multiple. This is a cash-on-cash multiple, typically the total value to pay it in multiple. It's often used, but does not take into account any time value of money. It makes a difference if you have a multiple of two after two years or a multiple of two after ten years. No need to explain that. So multiples are given, but still we believe there should be a better benchmark. We are using the couplon and SOAR 2005 benchmark against three benchmarks. So we do benchmark a investment grade bond index, a total return index. We do benchmark a high yield bond index. And we do also benchmark against the equity market using the S&P 500 index. A public market equivalent larger than one indicates an outperformance over the lifetime of the fund, whatever the lifetime will be. In percent. SOAR, for example, if you see a 1.2 public market equivalent, it indicates that this fund over the lifetime outperformed the market by 20%, just to explain the number. Let's go into the findings related to IRRs. Here are 448 funds. We observe a 9.2 average return and the median return of 8.5% as measured. In IRRs proxies. As you can see from the first to the 99th percentile, there is a large dispersion across those percentiles. So on the low rent, on average, you will only find a 5% return. On the higher end, taking the 75th percentile, you will find something like a 12% return. What is quite remarkable is that the top quartile delivers a 23% return as opposed to the bottom quartile which delivers an IRR, which is slightly negative by 4%. The dispersion between the high to the low quartile is quite remarkable. It's a 27% dispersion. So I would say the IRR numbers as a whole speak for careful selection. I wouldn't recommend to go for a randomized strategy and just pick whatever you get on the table. So selection is certainly a topic. You will always hear about the great average returns. So I agree a 9% average return is a great return. Just reconciling this with the BlackRock numbers, they are expecting 9.3. So we find a 9.2% return. So this is pretty much in line with other estimates. Let's look at the same picture in terms of multiples. We see a 1.3 multiple over the lifetime of a fund. The same picture, a large dispersion between the first and the 99th percentage, percentile. A large dispersion between top quartile and the low quartile funds. And again, the motivation to do a thorough due diligence and selection. Let's turn then to the question whether private debt funds on average do outperform the investment-grade bond market. Here is the result. Against the investment-grade benchmark, which is the Bloomberg Barclays investment-grade total return index, we find that private debt funds on average outperform this market by 8%. 8%, same picture, from low to high, large dispersion. The best of them outperformed the market by 38%. But here you can see, and this is the first important notice, I would say, that if you take a benchmark, you can go to the third quartile and you have no advantage in terms of outperformance to the benchmark. If you go to the bottom quartile you will be underperforming something like 18%. So you need to hit at least the two better quartiles where you need to go above median values to receive an outperformance or value or a non-liquid investment strategy. If we do the same exercise, use the public market equivalent against the high yield benchmark, you can see that even against the high yield benchmark, the average outperformance is 6%. The top quartile outperformance is 33%. The underperformance is somehow 19%. The same picture you need to go to an above median fund universe to select those funds that outperform the market. And you will see that from the worst to the best on average, but also in quartiles, it's a big difference to invest. Now a little bit of a surprise, we thought then, but most probably given these equity markets that we have seen in the last few years, private debt funds will not outperform the equity markets. Well, this assumption was wrong. We find an outperformance of 6% against the equity markets. A slightly comparable picture here at the two bottom quartiles. They underperform slightly, but if you happen to select nicely from performing funds, you go to an outperformance of between 6% to 42%, which is really interesting, of course, to have in the portfolio. Generally speaking, we also test in this paper whether there is performance persistence. So if a GP has a positive and outperforming performance in the past, will the follow-on funds managed by the same GP also deliver outperformance? The answer is yes. And we were asking the questions, well, what delivers the outperformance and that is something you can read in our paper. It's basically choosing the right economic conditions, market conditions. When a fund is launched, this is even more important, has a higher impact on future returns than the strategy, for example, or other elements, which we typically control for just a size, age, number of employees, et cetera. So let me give you some more insights about the risks. I've talked about the return of the asset class. I have another five to 10 minutes to talk about risks and topics in research. Here is two portfolios of private debt funds. So the first one is a very long sample. We looked at one GP, which managed to select those 280 investments over a period of 18 years. You can see here is the credit bubble or the global financial crisis, the green bars. And you can see that typically a good performing or a performing private debt fund will have most of the projects performing, that's the green and blue lines, and only very few of the projects delivering negative returns. You see a very big negative return here by minus 50%. But you only see a loss ratio, or a real loss ratio of losses in the magnitude of 1.4%. So if you take all those investments and you ask the question how many of those investments were negative and how many were positive, the response is well, 280 were positive, only 4 were negative or some 1.4%. Here is another one, another fund that we believe is a performing fund, slightly higher loss ratio, but you also see that on average a 100-delf project positive against only 4 projects negative. So why am I showing this graph? I'm kind of indicating to any private debt fund investor that you should not only look at the return on the black box level, like the fund. So you should also look into funds and look at the profile and the return distributions and the volatility of returns. So these data are typically available if you look into the funds. Another question that we can answer today is how market neutral are those funds. Somehow with the potential to disappoint you, these funds are not completely market neutral. You may have time lag effects in how the beta, for example, is measured. But if you look at the private debt fund industry, these are quarterly returns that we calculated at TIPD in Tilleberg. So these are quarterly returns, the green line. The red line is the high yield bond index, the workplace. And the black line is the investment grade index. So if you take those benchmarks, you see that there is a pretty high core movement of those quarterly returns. You can see that there is some time lag, but this is given by reporting standards. But you also see, that's the good message then, that private debt funds corrected less in the financial crisis. I will show you the same picture, just for the COVID-19 crisis. They recovered nicely. So the volatility is lower, but they are market-related and they are not market-neutral. In general terms speaking, there might be some that are market-neutral. I would say that those who consciously choose a strategy that cannot be market-correlated. But in the cross-section and over those funds, I would say if you want to assess market neutrality, you really need to use quarterly returns, recalculate them for a long time period to be sure that you have a market-neutral investment in your portfolio. Here is another important risk dimension, which is the modified value at risk, modified for the skewness of the quarterly returns. And you can see that our benchmark groups, equities on the right top here, high yield bonds and investment grade bonds have a less attractive risk return profile if we take the modified value at risk as a risk measure. We believe one should take modified value at risk rather than standard deviations, which is more often seen in the stock markets as a risk measure. And you can see that the debt funds cross-section is somewhere here, so quite a low modified value at risk is somewhere at 2.4%. Metalan, debt and direct lending, even a little bit on the left of the cross-section, so too highly attractive debt fund segments in terms of risk, but even for special situations and venture debt, those modified value at risk measures are really attractive if you compare them to, for example, investment grade bonds, high yield bonds and equities, I'm sure you will have questions here, and I'm happy to answer them later on. Here is another and the last exercise for today. What is the probability that you fall short of a 3% return target if you take those quarterly returns? So if I want to have a minimum 3% target, what is the probability that in the end I will receive less than 3%? Using the same sample and cross-section, here are the probabilities, you see that direct lending, a metalan debt, very low probability, below 5%, that he will have a return below 3%. You see that even venture debt, the stress debt and special situations have a relatively moderate risk of underperforming, for example, the equity market, investment grade bond market, or the high yield bonds. I think this is important as a long-term investor as you put money to a non-liquid strategy. So over time, what is my probabilities of falling below a certain target return? And of course we can calculate that for any target return, that's just a matter of formulation. The last chart on the market returns, and then I go to research questions. This is the private debt fund the industry's quarterly returns throughout the COVID-19 pandemic or market crisis. You can see here the S&P 500. Now this of course our quarterly returns. So you see that here is the period where the markets already rebounds. So that's also why for the S&P 500 measured us quarterly returns. These losses are kind of lower. We also use the high yield on the investment grade benchmark against it. And then we use metaline debt direct lending, the gray one, distress debt, venture debt and special situations. You see that only one strategy which is venture debt, this one, still bears some losses on the books. You see that all other strategies kind of had less losses. Losses that were lower than their benchmark indices they recovered quite nicely together with the market. Right after the COVID-19 bounces back to a normal level. So I would say this reconfirms that private debt markets are not market neutral in the mathematical sense that it is somehow sometimes advertised. Research topics, just eight points. The investor perspective, timing, portfolio optimization, fraud, fraud risk, etc. This is very important research if a pension fund or any other institutional investors such as an insurance group, for example, wants to invest into private debt. How can I optimize my portfolio in a Markowitz or other optimization sense? If I take these returns, can I time the investment? Can I bridge finance, my capital calls, what are my expected shortfall and value at risk measures? What is my shortfall risk? There is really not a lot of research. We are happy for anybody interested to collaborate with our institute to deliver either numbers or questions. Private debt investment instrument perspective, which is the fund level which I've just now presented. But also we need more information about direct investments, syndicated investments, co-investments, etc. Then the portfolio level look. So what is really the portfolio level on the lying risk that these portfolios are bearing? Is it a risk adjusted return that is interesting or not? Because now we have just benchmarked against some total return indices. We are not sure whether the risks that we find in a private debt portfolio is higher or lower than those used in the index. Contract level research was nothing done so far. The capital receiver standpoint of use or why do corporates lend from private debt lenders? The institute perspective is it that public markets really substitute banks? Is it that private markets substitute public markets and banks? And if so, to what extent and why and in which market phases? The governance perspective there is a lot of research saying that private equity has a different governance model. Is that also the case in private debt? And the SRI and ESG perspective by the way we are finishing a paper now on ESG which compares private debt ESG to public markets and also what drives ESG transparency in the sector. This was my contribution I think taking into account Hans's introduction I'm exactly at 30 minutes. If you have questions you can certainly get this presentation by the CFA association but you can also mail me the mail addresses on the presentation. Also there is the institute's home page indicated and as I said I hope you will receive our paper on return and GP skill in something like two weeks from now. Having said this I am curious to hear your questions at the end of the webinar and I will end my presentation for the time being. Okay thank you very much Pascal very interesting presentation. Yes please don't don't hold back on your questions. You can just put them in the chat box. Annemarie we'll ask those questions at the end on your behalf so you don't have have to ask those questions yourself so don't be shy. Well as we have seen in the presentation of Pascal there's still a lot of research that we need to do that can be done. I was out of curiosity I was curious Pascal. We also do research with the cards to fund selection because that's also well an issue that's quite important for a lot of investors including myself. For example when you look at private equity there's a lot of research focusing on things like is there persistence in returns the size of the fund tells you something about performance and these kinds of things. Is that also part of your research agenda? Yes. This is an important part of our research agenda so we have looked at the GP skills so what skills must the GP have to perform the market. So our paper that's now coming out is on market timing skill so it's linked to to the credit market conditions we know that ex-ante so before launch of a fund some credit market conditions are indicative of future returns of debt funds but even more so ex-post credit market condition changes and those changes measured already capital allocation time of a fund which we have seen is two to three years on average for some of them even longer they matter even more than the ex-ante market conditions so this is one outcome other outcomes are more related to typical controls as you have said size of other controls and this will also partially be covered by the paper but as you also said there needs to be much more research on how to select a performing fund than we are more than happy to collaborate with any institution that wants to know more about this very good good to know thanks again well now we move from the academic side to the investment opportunities and as I said at the beginning we have two excellent speakers to inform us on the investment opportunities in this market we have Natalie and Jerome from Schreuders and I think if I'm correct Natalie will start off with the presentation on real estate debt is that correct was it that case yes that is correct I will move over to Italy I would say take over the screen the floor is yours there we go right thank you very much everybody my name is Natalie Howard and I'm head of real estate debt at Schroder's capital I'm speaking obviously a little bit about my own product and I'm also joined by my esteemed colleague Jerome Nerud who is head of our infrastructure debt investments I just wanted to start off by saying a little bit about Schroder's capital for those of you who don't know Schroders Schroder's capital is a part of Schroders where we are looking to substantially expand this particular division within Schroders we currently have 70 billion dollars of assets under management with the majority of that being in US securitized credit and private equity and real estate and then coming behind that we have our infrastructure business our insurance linked business and our impact business and each one of those products are specifically focused within particular areas of those various private markets we have over 250 investment professionals and in fact nearly 500 employees globally and we are very focused on providing and continuing to provide a consistent track record to our investors with a transparent integration of the SG sustainability and impact capabilities I'm now going to talk about the thing I know the most about out of all of those things so real estate debt is a new asset class for Schroder's capital although I and my team have been involved in this market for anything from 15 to 30 years at a variety of institutions Schroder's have set up and recently launched real estate debt funds across Europe and so I just wanted to talk a little bit about the context of the real estate debt market and what that can offer in terms of relative value for insurance companies and potentially other types of investors so here just really setting a scene in the market we have just over a trillion euros within the real estate debt market in Europe and the UK on top of that which gives roughly about 250 billion per annum a financing requirement because the majority of these loans are variable rate loans on a five year term what we've seen over de last 10 years particularly initially within the UK market is an almost complete retrenchment of the banks from real estate lending they have reduced their credit appetite moved out of stretch senior and whole loans and mezzanine lending and have retreated really just to investment grade lending some banks have pulled back further and are focused only on existing clients en are not looking to service new clients and have also reduced their sector appetite across the real estate piece Natalie may I ask you a point is it possible for you to put it on a slideshow so that you can make it bigger okay I will here we go hidden in the corner no that didn't work no I can't hold on maybe this might do it slideshow is that better okay so this retrenchment of the lenders has created a substantial funding gap within the market and what we saw in the UK in 2010 was we saw quite a sharp retrenchment and over de last 10 years that market is now roughly about 20% alternative lenders and if you look at that in comparison to the US market where alternative lenders are about 40% of the market and then you look at Europe where alternative lending is about 6% of the market you can very clearly see the direction of travel of a bigger proliferation of alternative lenders moving into that gap that has been created a little bit in the same way as we've seen in other private debt sectors in terms of the opportunity and relative value there are a couple of aspects of real estate debt that I think are interesting one it is a very easily accessible marketplace or investment via a variety of specialist teams that you have in a series of different asset managers the market is illiquid in Europe but it does deliver an illiquidity premium to investors depending on where their risk appetite might be here in the chart on the right hand side what we try to show is we try to show the variety of real estate debt and the risk return that is available depending on what the risk appetite is and first of all in the navy blue we have the investment grade senior debt and here we are targeting returns of between 150 and 200 basis points in Europe and this is delivering an illiquidity premium over investment grade corporates as well as diversification into secured lending en dan moving up the risk curve we have stretch senior loans which are essentially loans that are secured on again good or good quality core and core plus assets but with a little higher leverage than you would get on an investment grade loan and the banks really only play now in this investment grade area of the market the remainder is exclusively alternative lenders en dan we have a prelet and partially prelet development funding and again slightly higher returns because there is two factors is one is obviously being paid for slightly additional risk but also there are far fewer lenders that are prepared to look at development funding even with a prelet and then we move into opportunistic whole loans where we are looking at targeting circa 8% returns and these are loans that are typically levered to around about 75% on speculative property perhaps a hotel that's never been opened and newly built without a trading history perhaps some sort of speculative development where we are moving into 9% returns en lastly we have the mezzinine lending where you are improving the property aspect of it so junior loans secured on core and core plus stabilise an income producing property but where you are the second mortgage so therefore you are taking more debt risk so just to set a little bit of context here for real estate debt and where that potentially sits in comparison to other classes as i'm sure people are aware real estate debt works quite well from a Solvent C2 perspective because it is secured debt and here we show how the returns that you can get for the different credit qualities across the different real estate debt buckets on the left hand side can deliver you anything from 1 to 2% all the way up to your unrated risk at 8 to 10% for high yield and when we look at the comparison to the European bond market and indeed the US market both in high yield and also an investment grade you can see there's a clear pickup which covers the complexity and also the illiquidity and then here just talking a little bit about the market opportunity post COVID-19 I think we have seen more retrenchment of the banks particularly within the German market has been very noticeable with reduced lending to real estate and less so in the French market and this has allowed a greater opportunity for alternative lenders to come and move into to this area and in fact over the last 12 months we have seen a couple of new entrants into the market who are big players within their private equity debt market we've also seen a divergence in terms of sector performance where we have the darlings of the sectors which are logistics and then to a lesser extent offices food retail is very high on people's lists of favoured sectors but when we look at retail more broadly particularly secondary shopping centres people are less favoured and in fact banks currently a lot of them will not lend on any retail irrespective of whether it's a good retail or not and the same goes for hotels given everything that's gone on over the last two years so what this does is it then provides additional additional area where the alternative debt providers are able to cherry pick opportunities where they can actually look to take a very small amount of risk en een outsize return for that risk because the factor the matter is is there are very few options for borrowers to go to to lever their property investments we've also seen a huge acceleration in the focus on ESG from regulators and governors governments but also from borrowers directly and in fact at Schroders our real estate debt funds are articulate accredited which we've been able to do because they're newly set up and that's relatively straightforward and then I think you know the central bank responses has further driven down bond yields and so I think there's a real spread pickup for real estate debt and to offer that relative value so I think the key characteristics of real estate debt there's a consistent return profile that is paid on the court out of the quarterly interest payments derived from the loans there is an ability within this to pick the risk reward that best suits your investment strategies and your portfolios at the higher end it is an alternative to real estate equity coming a little bit down that the risk curve into perhaps a high yield opportunities and I think lastly it's a very attractive time to move into this market unlike the leverage finance market what we've seen in real estate debt is we've seen a consistent covenant heavy loan structures because it is a lender driven market and we've seen the maintenance of yields and returns due to the lack of competition in the marketplace so I think the key takeaways retrenchment of the lenders I think that it's very much a lender market and we believe it will continue to be so we think there are lots of opportunities across the sectors particularly for firms like Schroders that have big real estate equity businesses that help support underwriting and views on specific local real estate and then finally we believe that there is a pickup to comparable public debt depending on where you want to pay en to that note I apologize I have run a little bit over but to follow on I'd like to introduce my colleague Jerome and I will stop sharing my screen so that hopefully he's able to do exactly that You're still on mute, Jo? Is that better by any chance? Let's, it's okay All right, I've been muting and muting but because it's a bit bizarre anyway Right, so Sorry if all this is interlude So I suspect that many of you have allocated to infrastructure equity many of you have allocated to direct lending or private debt but I'm pretty sure that not so many of you have allocated to infrastructure debt that may be a little bit bizarre but that what I've seen over the past few years and in the answer has been consistently that infrastructure debt does not yield enough So what I'll be trying today is to convince you or explain you how to look at infrastructure debt in a different way en potentially consider it as a relevant asset glasses to invest it across the cycle hence the title of this presentation a no-wherever solution So first and foremost just again last technical problem that just can't move the slide deck with me for a sec Here we go So what is infrastructure debt? Obviously it's all about infrastructure and financing the real economy So on that note you are all familiar with infrastructure what is behind infrastructure and how that plays out What I would like you to do or look at is to forget what you know about debt or infrastructure debt and see it from another perspective Namely see it not as a debt product as opposed to equity but probably as something who is different and has a risk return profile So here we go slides are off just come back and if you look across the capital structure then there is a risk return continuum so one must not think as infrastructure debt as opposed to equity for example but rather as a risk return continuum where a risk budget will give you a certain return typically senior debt would give you a 2-3% return non-investment grade debt would lead to a 5% return On the top of the cap stack equity will give you something around 10-12% which is 5-6% yield plus capital gain There is a big distinction to be made there because TEPT will provide you with cash yield and cash yield and cash yield whereas around half of the performance for equity will be delivered in terms of capital gain so that means that everything goes well on the equity side you'll get 5 plus 5 equals 10% return if things go so-so you will get 5% plus 0% as a capital gain if things go wrong you'll get 5% yield and minus 5% capital loss you'll get 0 I think the big difference is debt will bring you income commensurate with the risks whereas equity will give you a premise of income and a premise of capital gain so this sets two different purposes and one needs to look at the global picture and the asset liability picture if one has to deliver income to policy holders for example and only income then probably debt is a little bit more relevant than equity because equity will deliver better return but will deliver a lower cash yield or a negative capital gain or capital loss so it's all about striking the right balance between asset and liabilities and therefore debt can be seen as an integral building block of an asset liability matching strategy especially on the income couponing side so this slide has been about directive merits of infrastructure debt and infrastructure equity across the capital structure we will see later on the respective merits of infrastructure debt versus corporate or more traditional private debt and how to counteract or counter argue versus the general claim that infrastructure debt does not yield enough but before that I would like maybe to put things into perspective and to put things into perspective I wish to start with a number a very intriguing number 2.875 so this number has a double meaning it's not the square root of something or it's not a magic number or whatever it is essentially what sovereign risk-free rates would give you 10 years ago and it's at the same time what one could get when investing into high yield bonds into this market so in essence 10 years ago risk-free rate 2.875 today 2.875 means double B so maybe infrastructure debt was not relevant 10 years ago but since we are in a zero rate environment and risk-free rates being even negative in some countries well infrastructure debt might be a quite an interesting medicine for some investors en dat is what we are going to see in the next slide that well that is a bit technical but I need to go into the details because there may well be some skewed views if we keep on the surface of things first and foremost what this number of statistical data point shows you is that not all triple B's or not all double B's are born equal in statistical terms that means that's the probability of default and the recovery rates so in essence the actual loss of triple B infrastructure debt is closer to single a corporate than it is closer to triple B corporates so the short message is from an expected loss perspective triple B infrared behaves more or less like single a corporate debt in the same vein double B infrared behaves more or less like triple B corporate debt so when one benchmark infrared one should think of this twist of this trick that one has to contrast infrared with offering that at a similar risk budget namely a similar expected loss so if one contrasts infrared investment grade infrared with single a that may well see or show infrared as an attractive alternative so single a public bonds probably 50 75 ish versus 200 basis point over for infrared so quite attractive similarly non-investment grade infrastructure debt will give you 5% for a risk budget that is equivalent to triple B corporate debt and we all know that expected loss increase with rating in een exponential way so you'll get a return that may be a little bit lower than private debt it's not six seven eight it's five but the risk budget you have is much much much lower so in essence from a pure risk adjusted return perspective infrastructure debt is quite attractive when compared to publicly listed bonds or to direct lending and these numbers as you can see from the small prints on the slides are not shortest numbers they are from a repeatable rating agencies so these not not not to name them and they have been used over a very long period from 1983 to 2015 so over more than 30 years it's quite a long period so these are what's a reliable number so in essence infrared may look a little bit cheap but if you look at it from a risk return adjusted perspective it's quite interesting I've been discussing risk return for some of you regulatory capital might be on the agenda especially solvency 2 the good news for you is that there is a specific solvency 2 treatment for infrared so in a nutshell there is a variable regime and infrared has a regulatory capital charge that is 30% one third lower than traditional corporate debt so if one looks at regulatory capital as well infrared is a very interesting tool from a regulatory arbitrage perspective so risk adjusted return risk adjusted return is interesting point number one regulatory capital might also be an interesting component to look at we are in 2021 so I cannot avoid the theme of ESG and sustainability and impact I'll not be too long on that front because it's quite obvious for everybody that infrastructure is an obvious candidate for ESG oriented strategies just to name renewables for example that's infrastructure that's energy transition that's about investing in new and greener infrastructure so the icing of the cake is that by investing into infrastructure debt you'll get de facto an ESG or green angle to your investments just to summarize why is infrastructure debt interesting because it will provide you income yield with low volatility and low risk because obviously it provides duration because it can bring you efficient regulatory capital treatment and last but not least because infrastructure is all about ESG so that's the end of the presentation and hopefully by now you've been convinced that infrastructure debt is a little bit less irrelevant in your location that you may have thought 15 20 minutes ago thank you alright thank you very much Sharon for your presentation and I think now it's the time that we move on to the Q&A session I've seen a couple of questions coming by that should be now in the chat box if you have any additional questions please direct them to the chat box and Annamarie will take care of them I'm now looking at Annamarie because you probably have seen the questions coming in in the chat box so can you kick off you are still on mute hi that's better yeah okay sorry thanks for all the presentations a couple of lots of questions coming in and particularly so far for the question on Pascal and his research let me kick off with yeah a question on the risk measure is it purely sample based from history or something more complex how did you calculate this Pascal is that a question to me or to Pascal sorry to Pascal yes this is using historical quarterly returns so it is not a very complex calculation the modified value at risk is just taking into account the skewness of the returns that's one of the methods we typically would use en dan de shortfall risk calculation is just using historical returns calling them expected quarterly returns minus the target level divided by the variation of standard deviation and then transformed by the z value into a probability so it's not rocket science it's very simply calculated but it gives you a feeling for what the risk of the portfolio looks like could you elaborate on what you think drives the historical outperformance and what will be a sustainable source looking forward yes so i saw this question this has several levels to consider one is what also my co-speakers have said there is a regulatory change in the market that's only one source of sustainable returns for example there is research out that proves in a difference of difference approach that banks have really gone down in loan to value based lending so also they do not like to base lending on existing or future projected cash flows they like collateralized lending rather than cash flow based lending which is a change of the game basically in the market so in the past typical lenders if it is syndicated loans or merchant banks they will be using they would be using in the past cash flow based projections and then lend against those projected cash flows this is something that we see less in the market so today we see collateralized lending and also in parallel the loan to values have gone down at least on the banking side so the nature of the lending is changing on the one side but also the LTVs are going down on the banking side that provides opportunities to private lenders on the other side I would say from a helicopter view there are two sources of sustainable good returns if you want to say good and versus bad which is complexity Natalie has mentioned that term I very much agree that private structuring can lead to transactions that are faster that can cope with more complexity in a transaction so if you need to be fast and able to structure more complex transactions and then clearly the source of that is highly qualified teams so I wouldn't think that private borrowing or private lending is typically a mass product I think the market is somehow limited so it's not the right form of lending for everybody but once a transaction is more complex than the standard and once it needs to be maybe executed in a speed that doesn't really fit a syndicated loan agreement for example and if you have a really good team who is able to do both fast and complex transactions and that is a source of superior performance but also as I said as our paper also finds out market timing is really important so for example these funds are allowed to recycle their capital so they can sell and reinvest again throughout the investment period so they will be structuring transactions signing transactions and then if the market conditions change over the first let's say two to three years some of those borrowers would want to get out refinance their debt tranche by a new facility and that typically triggers minimum return clauses in the contracts that typically triggers penalty fees etc etc so there are additional fees in the starting phase of a fund which also makes a return more attractive in that sense so the recycling of capital in the early phase of a fund improves the return they might collect origination fees twice or even three times so that's very important and also they might be selling portions of their debt in the secondary market which is a typical way to profit from changes in market conditions which is also observed in the private debt space and that enhances largely the return of those private debt fund vehicles so I would say quality of the team allowing them to be fast en structuring complex transactions but also the very mechanic of a private debt fund which is cashing in minimum returns cashing in minimal multiples penalty fees recycled the capital into a second phase of investing in the early stage of a fund and selling portions in the secondary market will make those funds on a sustainable basis more successful maybe I can add a question to that maybe for Natalie because all three of you are talking about well the role of the banks basically the banks that are retreating from the market in a way which is apparently a drive of the private debt market but I'm curious to hear from you whether there is more than that because you see also strong increase in activity in the private equity market which you cannot attribute to the effect that well banks are less active so there's more than just the role of the banks I would say so what are the other major drivers of the growth in the private debt market maybe for you Natalie so I think there are a couple of things I think clearly the opportunity created by the retrenchment of the banks is one factor but I would say the second factor is the investor universe B-day pension funds or insurance companies are on the hunt for some level of yield and depending on their risk tolerance they are looking for alternative ways of obtaining that return and so I think that when you move and you look at private debt you don't necessarily for insurance companies for instance want to increase the risk level so therefore you're perhaps looking towards investment grade infrastructure social housing investment grade real estate debt so I think you've got the pushing from the investor side for looking for more product and a broader range to fit their portfolio at the same time as the market opportunity that has been created by the banks pulling back across the piece that's not just in real estate debt it's across the whole credit spectrum okay thank you maybe back to you Annemarie Hi Jerome talk of course about the ESG in the in-front debt there was also a question how is ESG integration in the private debt Pascal yes thank you for the question I'm happy to answer we have just now finished a draft of a paper we were in a team so we looked at the ESG integration in the private markets including not only private debt but also private equity venture capital buyout funds etc etc so this is a global database worldwide database addressing exactly that topic we are looking at transparency in terms of ESG we are looking at the risk at the relationship between ESG risk and ESG transparency but we're also looking at other factors such as being a signatory to some standards like the United Nations principles for responsible investment etc en we look at investor categories how they influence ESG transparency and different asset classes this study will be published I hope by the end of the year the outcomes are kind of very interesting so we we overall observed that ESG transparency is lower than in the public markets that is not a big surprise giving the pressures in the public markets but there is a clear link between risk and transparency so we would not say that we observe greenwashing in the market this is one of the big question marks so do private market participants greenwash ESG so we don't exactly observe that so there is a clear relation between risk and transparency but what we also see is that there are other categories other than risk that do drive transparency of those funds and then these are like those signatory dimensions and they don't want to give the results as of yet because that's an interesting topic is it does it create value in terms of an ESG quality measure or ESG transparency to be signatory to UNPRI yes or no are the differences between the US and Europe I can say yes there are big differences how do investors effect the ESG transparency it doesn't make a difference if a firm has an investor base that is more institutional driven than private investor driven etc how do these asset classes differ in terms of ESG happy to send that out once the paper is in the market but we're still working on the data especially in interpreting the data what I can say is that label adopters so we call in a more politically correct way you could call them green rushes but let's say label adopters on the perform the market so those who do as if they were ESG compliant but are not really ESG compliant depends on the definition how you find that out they do on the perform the market and this may have several reasons so the ESG paper I think is going to be out in the market in december and I'm happy to share with your association and the members the results and discuss those results if this is important for you members which I hope and believe of course also I wanted to add to Natalie's comment on what's the driver of this market we should not forget flexibility of those instruments so anybody who has tried to restructure a public bond with retail investors we'll know that this is almost impossible to do so restructure a public debt instrument in view of any corporate changes or any maybe market driven changes and there is no flexibility whatsoever unless you have a call option on the bond but if you have if you have longer term bonds in the market and I think today's markets really also aim for more flexibility even though if banks still are in the syndicated loan market aggressively advertising their capital I think private debt just offers more flexibility to borrowers and they are willing it seems to pay something for that flexibility I cannot prove that empirically that's just the gut feeling would be an interesting study A question for Pascal maybe then we go over to Natalie and Jerome again but there's some questions on the correlation of returns between private debt and private equity Pascal, what's your view on the correlation between returns between those two categories and do you think it could be let's say a potential hidden risk for investors if they want to invest in both asset categories Yes, that's a very valid and an important question which again shows you the necessity for more research in the sector We do know that private debt is largely also driven by private equity so these large capital providers such as KKR, Apollo the black stones etc of this world they do have both they typically have private equity and private debt that activities and they know each other have given you the number in terms of market concentration so these guys the good guys all know each other en it might well be that if one makes a completely wrong assumption about one industry development for example or companies in that industry that then you have a risk concentration on this wrong assumption that is easily possible there is no research done on that so I cannot really comment but I would say approximately 50 to 60% of the private debt market is driven by private equity sponsors and given that these markets are so much concentrated I would also give this some weight when you construct a portfolio to really take care of these concentration risk topics Maybe I can ask another question on a brief for Jerome I was triggered by one of his comments with regards to infra debt which could be a good alternative for let's say well single A corporate if I'm if I'm correct which could also mean that infra debt could possibly fit well within a matching portfolio where you try to match your liabilities two questions on that when you look at investors in practice is that also the way they use infra debt in that portfolio so for matching liabilities and does it also mean that that correlates well with in this case for example small price may be better than corporate or government single A paper it does to a certain extent what you well the common features of of infra debt and listed bonds is low risk and duration it it it one of the few areas in the private market when one can get 10 15 years paper with a full prepayment protection spend close so that's pretty much a duration tool that that's the two common the common features the two differences which are intertwined is that infra debt gives a higher return this is due to several things this is due to the complexity premium but this is as well due to the fact let's face it that central banks can buy public bonds they can buy private debt so the quantitative easing massive program have to conduct all on public yields so it does indeed yield more but and that's a big but like any other private debt infrastructure debt is illiquid and you know that investors by by regulation have a certain will have to comply with certain liquidity buffers so one cannot substitute all of its govies or bonds with infra debt well two reasons first of all the universe is not big enough to to fill the gap point number one and point number two any annual investor will have a limit on illiquid debt if it's two percent three percent five percent but there is a limit to its today in fra debt it is like the icing on the cake something one may use as a quick proco for for corporate bonds to spice the return a little bit up in exchange of of a liquidity but since it's illiquid and will remain so but by nature it just can't be a big chunk of a let's say a bond allocation for big investors it will remain a small option but an interesting one okay thank you very much I'm also looking at the clock since we are almost at five I'm checking with Annamarie are there any questions still left in the chat box maybe one more to to Natalie van Jon Berthes about exploding real estate prices aren't we looking at higher instead of lower risk for the coming years in real estate debt so I think that what we've seen and we've just recently published our updated house view on real estate performance which is a story of differing sectors I think you've got some sectors that are very clear winners and the weight of money into real estate equity is helpful in this and then you've got other sectors that are clearly that the losers I think that the the art of real estate debt is that we are only focused on the downside because that's what you get you don't get any upside so structuring the debt is all about structuring to a valuation that you have already stressed so that it is a value through the cycles and this is the way that the rating agency is also rate real estate debt transactions so when the market is particularly down we might lend 60 65 percent of property yielding 8 percent when the market is as prices are as high as they are at the moment we are more likely to be at 45 to 50 percent because we've already stressed that yield back up say from 4 to 6 percent so real estate debt like other debt products is all about focusing the amount of risk that you're prepared to take given where you are in the market having said that the overall outlook for real estate is quite positive with good areas of rental growth supporting and underpinning values where they are at the moment when you think that the risk free rate is pretty well a zero All right thank you very much Natalie well given time I think we need to stop here but not before I have thank my my speakers for today so great thank you to Pascal you should home Natalie thank you very much for sharing your views with us I also want to thank all the participants in this webinar for being here and for all your questions again the presentations and the link to the webinar will be sent out tomorrow anything else I have to to tell Annemarie am I forgetting something oh and I think we will yeah send round also the the new research materials so from from when they're getting out so that will be interesting as well to watch absolutely all right with that again I want to thank everyone I wish you a pleasant night bye bye thank you bye bye thank you thank you thank you