Not all debt is created equal: Vision Super


Vision Super will place greater emphasis on the capital structure of its private debt business as disappointing bond yields and a volatile market increase the importance of quality in defensive assets held in portfolios, according to the market strategist of the funds, Stephen Nash.

The pandemic’s effect on global fixed-income yields — which are at historic lows — has made defensive asset classes “a little difficult,” Nash says in an interview with Investment magazine.

As a result, he explains, investment managers will think less about interest rate risk and more about capital structure, as a way to create the new defensive portfolio. This will involve, among other things, focusing on the top of the capital structure in private debt investments.

“So that means instead of providing equity funding, people are going to focus on the more senior secured lending side of the capital structure so that you can generate a decent spread and still have a pretty secure position where , in the event of default, you have specific rights that can be exercised,” says Nash.

Vision Super’s preference for private debt is no secret – in February, Nash said Investment magazine‘s Private Credit Forum in Melbourne that the fund was considering bringing in a private credit manager, which was “appropriate” at this stage of the cycle given the expected long-term equity downturn.

“We’re looking at debt more than we’ve had for a while, so that’s a bit of a change for us,” Nash told delegates. “Other funds are doing the same. We’ve had a great decade for equities, but we think the next decade won’t be as good, and that will naturally mean a bigger role for debt versus equities.

While this theme remains, the narrative has developed as persistently low ten-year bond rates and volatility have heightened the need for debt safety and downside protection. Private debt wasn’t considered so important when 10-year government bonds were yielding 5%, Nash says, but now that 10-year government debt is yielding less than 1%, the need to look at private debt has increased considerably.

However, any move to private credit must be done wisely.

For Nash, that means ordering managers to be “conservative in terms of the loans they lend” and to avoid “exposed and reckless” companies.

“We try to avoid fast-moving companies with little borrowing experience and quite leveraged,” he says, adding that the fund looks for strong, well-established companies with a “coherent program” of growth. debt financing. “We are generally not interested in providing debt financing to venture capital-type companies, although it may make sense in particular situations.”

The fund hopes to never need the security, he says, “but it’s there as a safety net” and pledging the security mitigates the risk, which investment managers typically take on with unsecured loans.

“It is important in these situations to have this security, [for it] be there when you need to have a delinquent loan,” he says.

He says Australia’s robust regulatory system is another reason the fund is increasingly turning to secured private debt. “Private debt in this country is particularly attractive, mainly because we have a very strict legal regime, which helps the lender,” he says, noting that collections in Australia are “generally higher than in most other jurisdictions. “.

Overall, Australian credits have “performed quite well”, he adds, with generally lower default rates and generally higher recovery rates. While these findings may create scum in the private debt space, Nash says, it necessitates the need for increased levels of due diligence and analysis of all private debt.

As a result, Nash says “greater competition in the private debt market will improve private lending standards, but only over time.”

“I just think the opportunity set has changed significantly to support private credit growth over the past few years,” Nash continues. “The private debt space is going to get a lot bigger than we can even estimate right now. It’s an exciting time for private debt right now.


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