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The Asset Class with Reabetswe Kungwane · Strictly Business

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  Today we're going to talk about private credit, which is a first for me, so I'm
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  rather intrigued by it.
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  Why is it an asset class that apparently makes up 10% of so-called alternative
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  investments globally?
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  This and many other questions are going to be answered by Ria Betsuei-Kungwane,
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  Investment Specialist at 91 in Cape Town.
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  Ria Betsuei?
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  I'm being a cynic now.
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  Is it because other asset classes are simply too expensive at the moment or too
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  crowded that private credit
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  has gained prominence?
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  Or is it a viable part of a portfolio, on the other hand?
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  Hi, Lindsay.
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  Thank you for having us.
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  So I'll answer that question in two ways.
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  Simply put, the answer is it's both.
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  And the reason I say this is because private credit obviously gained
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  prominence.
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  Due to the crowded, expensive, listed bonds and equity markets, that's just one
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  of it.
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  However, investors have picked up that it actually is a great building block for
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  portfolios,
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  not only in terms of diversifying of these traditional asset classes,
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  but also because it actually does offer predictable cash flows, lower volatility,
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  shorter investment horizons relative to other alternatives such as private equity.
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  And I guess in general, I'd say there was an element where structural factors drove
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  the rise of
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  private credit.
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  And these structural factors include regulatory constraints that were put
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  against the banks
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  when we obviously experienced the global financial crisis.
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  A lot of these banks had to retreat and manage their concentration risk.
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  And as a result, private credit institutional investors saw a gap that
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  they could fill.
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  alongside these traditional banks.
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  And as a result of that, a lot of the borrowers, and these are companies,
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  mid-market companies,
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  saw that actually there's a need for flexible capital, particularly in emerging
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  markets,
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  that can be used in order to grow.
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  And because of those particular reasons, you find the increase in prominence of
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  private credit.
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  That's very interesting.
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  So it's not just a way for people to diversify their portfolios.
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  In other words, the investor.
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  But also it oils the wheels of the financial system in a way that maybe
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  couldn't have been said
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  10, 15 years ago when it wasn't so prominent.
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  Yes, that's correct.
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  I mean, a lot of these economies, particularly in emerging markets, which is
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  where we specialize mainly,
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  you'd find that a lot of the banking systems are not as developed.
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  And as a result, it just grew the demand for alternative forms of funding.
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  And as an asset class, yes, it's now become close to 10% of the alternative
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  asset class second to private equity.
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  But it also was, I guess,
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  a realization by the markets that actually you could move out of the listed markets
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  and into the
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  more private markets in order to expand the capital markets of these regions.
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  And there are multiple players in the space.
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  Obviously, I mentioned institutional private credit providers.
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  But you also have development financial institutions such as the IFC who have
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  actually catalyzed and
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  assisted these capital markets to grow, particularly on the credit side.
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  I love examples, Ria Betswe.
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  So can you explain or better still give us an example of private credit, how it works
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  and how it benefits both sides,
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  the borrower and the lender, the investor and the corporate?
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  Can you do that?
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  Yes, yes, gladly.
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  In terms of what private credit is, I mean, we highlight, just simply put at its
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  core,
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  it's lending to mid-market companies.
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  And so it's a normal loan facility that a corporate would perhaps find at a bank.
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  But in this instance, they're dealing with an institutional investor.
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  And that loan can take multiple forms.
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  So within private credit, you find sub-strategies that may include senior
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  direct lending.
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  And so by senior, obviously that's in terms of the ranking and cash flows that
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  can be paid or derived
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  from this loan where they are not encumbered to anything else.
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  So that's quite senior and secure type funding.
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  But you also find different types of private lending.
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  These include infrastructure debt, real estate debt, and also over and above that,
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  I'd say more distressed or special situation type debt.
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  And why I highlight these different types of funding.
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  Is that.
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  Actual borrowers choose the type of instrument that they want and some of
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  these instruments,
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  be it senior debt funding or the more subordinated higher risk type funding,
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  actually draw different forms of returns.
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  So I would say that as a client or as a company that is borrowing from a private
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  institution such as 91,
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  you actually can structure flexible forms of debt that are predictable.
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  You build a relationship with that institutional investor and you actually
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  gain access to capital outside of the bond or the
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  listed public markets, which a lot of these borrowers tend to want to do,
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  to stay out of those public markets.
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  That's on the one side.
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  Before you go on, Ria Bitswe, they want to stay out of the public markets.
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  Does that mean that they sacrifice liquidity, though?
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  If we're talking the company that's borrowing, they don't sacrifice liquidity.
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  I think in the one way they actually can get better liquidity.
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  because of the less administrative burden that you need to complete in order to be
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  listed.
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  So in a way, you can get your liquidity quite directly from the actual lender, in
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  this instance being the investor.
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  So they don't sacrifice liquidity.
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  What they do prioritize is not having multiple lenders at one time.
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  So you can still raise enough funding from two or three large private credit players.
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  as opposed to having your instrument be held broadly across the market.
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  And when it's time to call on that instrument, it just becomes cumbersome.
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  So an example would be we've currently financed a solar facility.
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  This is in the renewable energy space in South Africa.
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  And this project is called Druchfontein Solar 2, which produces
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  75 megawatts in terms of just its capacity.
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  And what we found is that...
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  obviously the actual borrower in this instance benefited from accessing capital
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  for clean energy infrastructure.
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  And this obviously supports the national energy goals.
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  But on the other side, as an investor, we benefit from stable cash flows, from
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  contractual protections.
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  And this is a key factor in terms of private credit.
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  You're secured contractually by the asset that you borrow to or against.
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  And as a result, you are in a better position as an investor.
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  And And...
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  over and above that, the investment actually aligns your impact to your
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  commercial returns.
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  And so it's really a nice blend of achieving financial return as well as real
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  world impact.
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  Now, Ria Bitsway, it's claimed that private credit is suited to emerging
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  markets more than developed markets.
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  And one of the reasons why is because of the adaptability, no matter what the
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  economic cycle is.
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  I mean, whether we're in boom times or in recession.
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  And because of that adaptability, see.
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  It's typically more used in the emerging markets than it is in developed markets.
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  Is that the case?
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  Correct.
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  So if we think about DM versus EM, I mean, to be quite frank,
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  we globally are facing very uncertain times.
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  And as a result, all economic cycles globally obviously move around and they
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  become very difficult
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  to time.
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  If we then just zoom in a bit on emerging markets.
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  What we find, and if we take the case of a lot of these African countries that rely
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  on minerals and commodities,
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  their economic cycles tend to be volatile and also quite rapid.
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  And I mean, the nature of it is that they're quite cyclical.
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  As a result,
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  when you take private credit as an asset class that we say is more defensive and
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  resilient, if you were to apply a senior facility that I explained earlier,
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  you'd find that you're able to actually...
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  receive your cash flows because of your seniority in the capital structure in a
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  way that is just less volatile.
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  And so as a result, it's an all-weather strategy.
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  But in order to have a solid private credit portfolio,
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  you can complement that with the more opportunistic type credit or distress type
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  special situation credit,
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  which allow you to enter a market cycle during contractionary periods, as well
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  as...
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  early expansion period.
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  So you can play around with the strategies found in private credit in order to just
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  take advantage of economic cycles,
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  particularly in emerging markets where they tend to be quite rapid and you can't
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  time them well.
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  This is obviously a highly sophisticated asset class, real bets.
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  Who's it for?
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  Is it just institutional investors or what about high net worth professional
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  investors?
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  You're very right, Lindsay, in saying that it's quite sophisticated and it does
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  require...
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  an experienced institutional investor who really has their feet on the ground.
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  And as a result of that, private credit has...
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  traditionally been the domain of institutional investors.
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  And by institutional investors, we're obviously talking pension funds, insurers,
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  sovereign wealth funds,
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  due to its complexity and scale.
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  However, we are seeing a change in that a lot of wealth managers are coming to the
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  fore to
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  just essentially incorporate private credit into their client portfolios.
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  So in a way, drawing the attention of professionals, as well as to an extent,
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  retail investors.
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  I mean, we are seeing more...
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  globally in the developed markets, a change and a drive,
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  which is happening obviously faster than those in EM,
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  around regulations where you can democratize private credit,
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  in a way getting to a point where retail investors can participate.
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  So in the US in particular, we've seen the rise of business development companies,
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  which are publicly traded entities that issue private credit to businesses and
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  because of the public nature of those particular entities and the fact that you
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  can trade in and out of them,
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  they've become quite accessible to a select number of retail investors and
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  professional investors.
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  And so it is a growing trend that we are expecting to see in the more EM and
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  growing market space.
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  Very final question.
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  Are you getting more and more demand for private credit at 91?
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  Yes, we are.
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  And it is as a result of this that we've seen a growth in the number of funds that
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  we've had to
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  to create and raise quite a lot of investor appetite.
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  I mean, we recently launched our South Africa Infrastructure Credit Fund.
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  As the name suggests, it focuses primarily on infrastructure in South Africa, in
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  Africa,
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  and I'd say offshore being broader EM such as LATAM as well as Asia. And because of
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  that, I mean,
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  a lot of our investors are saying, we want to invest in products that have real
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  impact.
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  You know, we want to be able to retire.
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  in areas and places that have sufficient and adequate infrastructure, you know,
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  where we are seeing a growth in urbanization.
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  And we want products that cater to that.
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  But at the same time, we also want products that can generate stable returns,
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  you know, that are resilient.
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  And I'd say that relative to public markets,
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  can actually offer very attractive risk-return dynamics.
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  And so because of that.
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  there's been quite a lot of growth and appetite coming through from our
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  investors.
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  Ria Betsey, thanks so much for your time.
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  That was Ria Betsey Kungwani, who is an investment specialist at 91.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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