By Joel Kranc
In a volatile market where institutional investors are seeking alternatives to add to their balance sheets, combined with an environment in which companies have more difficulties acquiring loans or credit, private credit is becoming increasingly popular.
According to Coalition Greenwich, more than half of institutional investors have dedicated part of their portfolios to private credit. Approximately 40% of those institutions are planning to increase their slate of managers over the next three years.
The survey also states that global private credit increased more than six-fold since the 2008-09 financial crisis, surpassing US$1.3 trillion in 2022.
Against this backdrop, the Public Sector Pension Investment Board (PSP) and the Alberta Investment Management Corp (AIMCo) have agreed to jointly invest in loan transaction opportunities sourced by PSP. Under this loan sourcing agreement, PSP Investments will source loan investment opportunities for funds earmarked by both organizations. This collaboration will allow both organizations to grow their respective credit investment portfolios.
PSP has been doing this since 2015. “The thesis was that credit was a great way of getting diversification in an asset class that provides excellent risk/returns,” says Oliver Duff, senior vice president, global head of investments for PSP. “Where PSP and the Canadians stand out is that they hire people that are in the business and right from the get-go the plan was to deliver significant alpha for the firm.”
AIMCo started investing in credit in 2010 and manages about C$6.1 billion whereas PSP manages about C$22 billion, which accounts for about nine percent of its assets under management.
“The collaboration with PSP Investments was a natural fit, given my relationships with the team and my understanding of the landscape in this particular asset class,” explains David Scudellari, senior executive managing director, head of international investment at AIMCo, and a former PSP executive committee member. “This loan sourcing agreement is a win-win that exercises the collective scale and expertise of both organizations. Simultaneously boosting the market presence of AIMCo and PSP Investments will ultimately benefit the clients and beneficiaries who count on investment returns for their financial futures.”
Duff says PSP is talking with multiple parties on potential collaborations, and each has its own aims and goals around exposure to credit. There may not be one single model to work from.
Duff adds that PSP alone is one of the largest large-cap players in the market, at least amongst the Canadians. With about a 10% return, according to the last annual report, “delivery and the proof of that concept has really been proved out well and the team has beefed up with well over 40 investment professionals across London, New York in Montreal,” says Duff.
Duff also says that within the past six months, U.S. banks have pulled back from direct lending because they were “stuck” with transactions post-Ukraine war and inflation rates moving up.
He references the Carlyle Group looking to buy private health care technology firm Cotiviti Inc from Veritas Capital for up to $15 billion, including debt. Reports say that the private equity firm is looking to partner with another investment firm to pull off the deal, and is also in talks with direct lenders to arrange $5.5 billion of debt financing. Duff says this deal illustrates how strong private lending remains.
While the investments for PSP remain very diversified, there is a slight overweight towards the tech, industrial and health care sectors.
“In the short term, we are looking to increase the opportunity set through new partnerships and selectively grow our global footprint in private debt investments. As long-term investors, we believe the outlook for this asset class is favourable,” explains Scudellari. “There are opportunities for us to selectively underwrite unique credit opportunities expected to generate a premium over their public market comparables.”
