Private debt will offer both income and downside protection: ASK 2023

Global investors will find opportunities to increase positions in private debt markets amid high interest rates this year and need to strengthen their diversification in alternative asset portfolios, said keynote speakers at ASK 2023 on Wednesday, a biannual forum on alternative investments hosted by The Korea Economic Daily.

Private debts will bring attractive returns to lenders given high rates, and demand for the asset class will grow as it becomes tougher to get bank loans, the speakers said on the day.

NPS EYES DIRECT LENDING TO MIDDLE MARKETS

National Pension Service (NPS) of South Korea, the world’s third-largest pension fund, will continue to expand alternative investments this year despite poorer-than-benchmark performance in 2022.

The fund, managing 939 trillion won ($701.4 billion) in assets as of end-February, achieved an 8.9% return last year. But the positive figure underperformed the inflation-linked benchmark by 3.15 percentage points, NPS announced earlier this month.    

NPS will shift its focus from equity to debt in the private markets and increase direct lending, NPS Chairman Kim Tae-hyun said during his speech. Direct lending allows loans to corporates without intermediaries like investment banks. Providing liquidity normally to middle-market companies, the first-lien loans offer strong downside protection to lenders.

NPS is also looking for opportunities in private equity in distressed firms and hedge funds for undervalued assets, Kim added.

KIC WATCHES SECULAR TRENDS FOR INFRASTRUCTURE

Korea Investment Corporation (KIC), the country’s sovereign wealth fund, will raise exposure to private debt and infrastructure for steady cash flow and stability of their portfolios. It will continue to expand alternative investments as the risk-adjusted profitability is greater than that of traditional assets, KIC Chief Executive Jin Seoungho said during his keynote speech.

The fund wholly invests in overseas assets. Its assets under management (AUM) amount to $224 trillion won, and the alternative investments make up 22.8% as of end-2022 with an aim for them to account for 25% by 2025.

It will increase investments in debt as US banks will further tighten their lending standards, creating opportunities in the private market, Jin said.

The state-run fund is also eyeing infrastructure, particularly renewables, data centers and other digital assets with macroeconomic resilience, as well as secondaries that offer faster exits from mature assets. It will intensify risk management for certain real estate areas such as the office space segment, strongly impacted by the remote work trend that continues amid the post-pandemic era, Jin said during his speech.

The fund is reviewing expanding alternative investments in emerging Asian markets, such as India, Vietnam and Indonesia, the CEO said during a meeting with New York-based journalists in April. 

KEEP DRY POWDER FOR OPPORTUNITIES: PIMCO

PIMCO, an investment arm under Allianz Asset Management of America LLC, sees great potential in opportunistic and private lending markets. The world’s leading fixed-income management firm makes a strong case for bond investment as yields have reset higher with an economic downturn looking likely this year, said Dan Ivascyn, managing director and group chief investment officer.

PIMCO will focus on keeping dry powder, or cash reserves to be deployed, to secure opportunities in the upcoming shallow recession this year. Corporate borrowings and leverage will see unprecedented growth due to tightened lending standards in the US, the CIO said.

The global opportunistic and distressed credits could reach as hight as $300 billion this year, where investors may find opportunities in the mispricing of assets, he said. 

PIMCO forecasts volatility in the banking sector will significantly tighten credit conditions, particularly in the US, and raise the risk of a sooner and deeper recession. Bonds at current yield levels can provide a great balance between income generation and downside protection while market dislocations create opportunities, the CIO added.

Write to Jihyun Kim at snowy@hankyung.com

Jennifer Nicholson-Breen edited this article.