Nicole Kidd

Private debt can provide better downside portfolio protection than many other asset classes during periods of economic uncertainty, like the one we are currently experiencing, according to Schroders head of private debt, APAC, Nicole Kidd.

“Private debt investors have recently benefited from the rising rate environment in the form of higher returns from base rates, as well as from an adjustment to credit margins reflecting the current more challenging macroeconomic environment,” Kidd says in a new private debt paper from Schroders.

“This is not surprising. Being a privately negotiated transaction, the terms and conditions of private debt lending can adapt to help ensure the underlying resilience of the investment from the perspective of the investor.

“Additionally, in this uncertain environment, private debt investors primarily focus on the stability and resilience of borrower cashflows, ensuring there is an appropriate cushion within the capital structure.”

She says private debt fund managers are different to other asset class managers in that they don’t primarily focus on equity valuations – something which can be particularly volatile in times of high inflation and rising interest rates.

“So, for appropriately structured debt where there is enough cushion to buffer cost and revenue pressures, the borrower should be able to continue to meet its interest obligations. These factors make this asset class appealing in the current changing macro backdrop,” Kidd says.

“Borrowers are currently facing a multitude of pressures, however good private debt mangers know how to stress test for them and, via a focus on diversification within portfolios, can find the best-of-breed names in sector classes.”

“For private debt investors, success in this uncertain environment comes from ensuring they are investing into better quality risk profiles and being compensated for that risk with higher spreads,” Kidd says.

When it comes to longer term themes, the paper points out that the focus on climate change and sustainability within private debt markets is expected to continue, with businesses which have not begun transitioning, or have avoided addressing the problem, potentially facing a penalty of higher priced debt.

“Similarly, industries which have breached or are out of favour from a social and governance perspective, such as mining or casinos, could also expect higher priced debt,” the paper says.

Read the full paper.

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Nicole Kidd

Schroders Capital – the private markets investment division of Schroders – has been awarded its first Australian private debt mandate from a large industry superannuation fund. The $250 million mandate will cover corporate, real estate and infrastructure debt, and is targeting a return of 4.5 per cent return over its benchmark, the Bloomberg AUSBOND Bank Bill index.

Schroders Capital has $103 billion of assets under management in private assets including $7.7 billion in infrastructure, $38.4 billion in real estate, and $25.4 billion in private debt and securitised credit (as at 31 December 2021).

Nicole Kidd, head of private debt, Australia, said the Australian private debt market although still nascent, is emerging as a strong and attractive region for private debt investors, in a global asset class that is forecast to grow to over $1.4 trillion by 2025. Schroders – with its long track record of growth and innovation – is well placed to capitalise on this growth for the benefit of its clients.

“We are seeing a great opportunity emerge in Australia in bringing together investors looking for attractive returns with borrowers looking for flexible capital.

“We also have access to Schroders’ global investment capability, bolstering our knowledge of local private markets and providing valuable additional information when making investment decisions.

“Our investment team covers the full spectrum of private debt across corporate, real estate, infrastructure; spanning senior, subordinated and unitranche. By leveraging this access to information, and our worldwide network, we can offer customised entry points into the asset class for clients.

“We create bespoke solutions for our clients by implementing our robust investment process including screening, analysis, due diligence, and execution for all of our investments, all while assessing and monitoring our ESG criteria throughout,” Ms Kidd said.

Chief executive officer of Schroders Australia, Sam Hallinan, said that institutional investors are increasingly looking to private debt to access diversified returns, and the team has experienced strong interest in this strategy.

“This is not surprising as there are some key advantages of investing in private debt for superannuation funds,” he said.

“Superannuation funds are becoming increasingly complex, dealing with more challenging paradigms, such as Your Future, Your Super, and the ability to leverage relationships with key managers is becoming ever more important to them.

“We see this partnership approach with our institutional clients as paramount, particularly in private assets where investment skill, experience and the ability to move quickly is critical.

“Private debt is becoming a sought after asset class for institutional portfolios. Investors are wanting to invest in assets that are non-correlated to equities, for instance, and that offer good diversification. Private debt portfolios for institutions can also be customised to ensure best fit with overall asset allocation strategy.

“This is an important milestone in the build out of our private assets business in this region,” Mr Hallinan concluded.

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Chris Durack

In an environment where company valuations have become distorted, interest rates remain low and volatility in listed markets is high, private assets will play an increasingly valuable role in helping investors meet their objectives over the longer term, according to Schroders Australia country head, Chris Durack.

“Investors are seeking new opportunities to achieve their objectives and to diversify their portfolios across uncorrelated investments in traditional listed equity and fixed income markets.  In this environment, high quality, sustainable, unlisted assets play a useful role in portfolio construction, allowing investors to access the full breadth of investment opportunities in the market in order to achieve their longer-term objectives,” Mr Durack says.

“Private assets are relatively new to the Australian market for retail investors. But we know from the latest Schroders Global Investor Study that the majority of investors (67 per cent) are willing to hold investments for at least seven years if they can offer a potentially higher return and private assets fit this criteria.

“As an alternative source of return, private assets can help to diversify investment portfolios and can offer a revenue stream or potential capital growth to help meet long-term goals.”

Claire Smith, alternatives director, says company and market dynamics are also shifting which is creating opportunities.

“The number of public companies listed on Western exchanges continues to decline and investors globally are following suit, increasing their allocations to private markets. As private equity transactions price off fundamentals, and with less capital in the market at present, we’re currently seeing very sensibly priced opportunities.

“Private equity can deliver higher long-term returns, offer access to companies that are diverse in stage and size, and deliver portfolio diversification due to its unique investment universe, valuation methodologies and low correlation to listed markets.

“Traditionally, private equity investments were not easily accessible to a broad range of investors due to their large investment minimums, the requirement to meet periodic and irregular calls for capital, longer investment horizons and low liquidity. However, this is changing with new product solutions coming into the market.

“In the wake of COVID-19, private equity market valuations are currently lower than have been seen in recent years, which makes it potentially an attractive time to invest.

“The small to medium private equity market offers strong opportunity for growth in the current environment. We particularly like non-cyclical companies, such as healthcare, technology and other essential services which have performed strongly during the pandemic.”

Additionally, Nicole Kidd, head of private debt, points to the dislocation in the Australian loan market, with the banks – which have traditionally dominated the lending space – reconsidering their risk appetite in certain parts of the market, creating a shift in the supply/demand equation between lenders and borrowers.

“There is a growing need for institutional capital to fill the void and we are seeing a greater volume of opportunities structured with institutions in mind. Alongside this we have investors who need an income stream and are facing a market where dividends are depressed, and bonds are offering minimal returns. We see our role as bringing both investors and borrowers together, by providing access to well-structured loans, and returns with low or no correlation to listed markets” Ms Kidd says.

“The impetus to consider investing in private debt in 2020 has been driven by a search for higher yield, or duration, or a combination of both, but the market is complex and requires specialist experience.

“It’s an opportunity that has not gone unnoticed, with Schroders’ recent Institutional Investor Study finding that 28 per cent of investors globally plan to increase their allocation to private debt in the next three years. This indicates that investors value structurally defensive debt instruments in a private market setting that also allows for flexibility.

“Currently representing only 1 per cent of global private debt AUM at USD60 billion, the Australasian private debt market offers significant growth potential.

“The Australian private debt market is an important and emerging strategic opportunity for investors,  where credit-focused managers can help further drive the range and depth to capture valuable returns as the market continues to diversify away from the increasingly risk-averse bank sector,” Ms Kidd says.

“With a long history and deep experience in private assets globally, Schroders is investing in its local capabilities. We are committed to working with Australian investors to leverage private assets to help achieve their objectives,” Mr Durack concludes

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Ms Kidd joins from RBC where she was most recently Managing Director and Head of Corporate Banking Australia and Institutional Client Management Asia-Pacific.

Chris Durack, CEO Australia, said: “A key strategic priority for the Schroders business is to continually develop and evolve its Australian investment teams and capabilities.

“The developing fixed income landscape provides us with an opportunity to invest in our private debt capability, and over time we aim to build solutions to provide our clients with greater access to these attractive markets.

“The bank debt market in Australia is becoming increasing disintermediated, providing opportunity for institutional investors to gain access to favourable risk-adjusted returns. This is a result of both increasing bank regulation (where traditional bank returns are more difficult to achieve with higher capital imposts), and desire for banks to hold lower concentrations of single asset exposures on their balance sheets than they previously were, meaning the door is open for so-called ‘non-traditional’ lenders.”

Ms Kidd brings 25 years of investment banking and asset management experience to the business which will be crucial for developing this new function in Australia.

The Schroders Australian private debt function will sit within the broader fixed income and multi-asset team reporting to Simon Doyle, Head of Fixed Income and Multi-Asset.

Simon Doyle commented: “Nicole brings a depth of experience in private debt to Schroders.  She is an investor of extremely high calibre and experience, and has a proven track record with a strong client focus.  These qualities will serve our clients well as she strives to deliver high quality outcomes for their portfolios.”

The appointment follows the move by Schroders in 2019 to appoint private asset specialist Georg Wunderlin to the role of Global Head of Private Assets. Reporting directly to Group Chief Executive, Peter Harrison, Mr Wunderlin oversees the continued growth and development of its private assets business on a global scale.

Ms Kidd will also have a reporting line into Mr Wunderlin, underscoring the importance of this appointment to Schroders globally.

Schroders’ Private Assets and Alternatives businesses manage A$81 billion* of AUM on behalf of its clients, with this capability including Private Equity, Securitised Credit, Infrastructure Finance, Insurance-Linked Securities, Impact Investing and Real Estate.

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*As at 30 June 2020.

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