LGPS clients share their experience of investing in Private Credit

Investors are looking for private credit exposure that can provide a differentiated and reliable approach during volatile times, this was discussed at a BlackRock industry roundtable in March.

Private credit is enjoying a big moment. Data provider Preqin predicts that private credit will be the world’s second-largest private capital asset class in 2023, with an accelerating compound annual growth rate of 17.4 per cent.¹

Everyone wants a piece of the action, which would explain the recent proliferation of funds in this space, all looking to capitalise on clients’ need to generate returns in a difficult and volatile economic environment.

At a recent roundtable, BlackRock asked clients what it is that they want from private credit providers and how they choose between them.

Not all private credit managers are the same

Ian Brown is Head of Private Markets at LGPS Central, which manages £50bn of assets for eight Midlands-based government pension schemes.² He said that at first glance all private credit managers can appear similar.

“You need to dig to try and differentiate to pull out some real differences.”

Experience and a solid track record are key. Brown said he’s searching for teams that have already experienced times of economic stress and know how to deal with it.

“We want people, at the very least, to have been through the last financial crisis,” he explained.

“That’s because we want people to know how to recognise what can go wrong, how to structure deals to take account of the sort of environment we’re currently going through.”

“We look for discipline and a willingness to walk away from deals.”

Having a fund in sterling is particularly attractive to Linda Desforges, of the Border to Coast Pensions Partnership, who said that her partner funds are very keen to invest in private credit.

“Partner funds’ liabilities are in sterling. So if we can get the assets based in sterling as well, then that’s a plus.”

Private credit: the Environmental, Social and Governance (ESG) advantage

Desforges added that clients are also interested in private credit funds that have ESG embedded in the process.

Approaching it as a tick-box exercise is not good enough, she said. “It can’t just be that you have yearly meetings on ESG; they’ve got to be meaningful.”

ESG risk is really a credit risk, said Sonia Rocher, managing director of BlackRock Credit Strategies. Because of this, ESG has always been fundamentally embedded in the way BlackRock makes investment decisions.

Partners can receive ESG reports at portfolio level, both in terms of ESG factors, but also statistics and KPIs that include carbon emissions, diversity in the management teams and on boards.

ESG Screening risk : The benchmark index only excludes companies engaging in certain activities inconsistent with ESG criteria if such activities exceed the thresholds determined by the index provider. Investors should therefore make a personal ethical assessment of the benchmark index’s ESG screening prior to investing in the Fund. Such ESG screening may adversely affect the value of the Fund’s investments compared to a fund without such screening.

Benefits of sector knowledge and experience

Knowledge is power in a tricky market and Stephan Caron, managing director, head of European private credit, BlackRock, said that sector and geographic experience is key to performance differentiation.

“In this environment of uncertainty, and volatility, we think that portfolio construction is extremely important.”

Tech is appealing and healthcare assets are a mainstay of a defensive portfolio, but, as Caron said, it is about more than choosing the right sector.

“You need to have that specialist knowledge to identify the sub-segments that are more attractive. Speciality pharma we think is very attractive right now.”

Geographically, too, knowledge on the ground matters a lot. BlackRock is one of the few managers with a solid local presence in Germany, where the number of private credit deals has grown rapidly. It looks likely to continue to be a very appealing market for deploying capital at attractive terms.

Why differentiation is vital in volatile markets

In today’s markets, as pension funds continue to strive to meet their liabilities in the safest way possible, private credit will continue to play a huge part in many strategies and the number of products offered will grow.

The ability of a manager to demonstrate performance and previous experience through times of economic stress and know how to deal with it, will be critical for success. It’s only through differentiating products, knowledge, ESG and sector relationships that managers will be able to deliver what these clients need.

<sup>1. 2022 Preqin Global Private Debt Report, Preqin, January 2022.
2. LGPS Central Limited, March 2022</sup>