The private debt market is a growth story, evolving from the ashes of the global financial crisis to become an asset class in its own right. AlphaWeek’s Greg Winterton spoke to Craig Reeves, Founder at private debt investor Prestige Funds, to learn more about what he is seeing in the space.
GW: Craig, one of the biggest geopolitical stories at the moment is that of energy security. What sectors lend themselves to support this goal, and why is private debt a compelling method of funding this?
CR: High gas and electricity prices have now become a major concern and the top news story in the UK. Part of the problem stems from under-investment and insufficient incentives for the clean energy sector for some time now. We provide lending capital to biogas energy projects around the UK, which are designed to provide farms and rural communities with a clean source of renewable energy. Indeed, we are getting close to the point where towns in the UK will be able to generate power from the waste they produce. But the funding required for this is not coming from commercial banks – it is coming from the private lending market.
GW: Still on the ESG theme, there are numerous potential investments that can support an investor’s ESG mandate. What are some of the other sectors that you’re seeing demand for private debt solutions from?
CR: Private debt has become a major source of essential funding in the UK for small and medium-sized businesses. These companies are major UK employers. Since 2008 and the financial crisis they have found it increasingly difficult to interact with the banking sector. Private lending provides firms with essential, secured capital lines to fund their growth. During the pandemic, our lending partners were very active in deploying government support through our network to the companies that needed it the most. There is a strong social element here, as this activity was helping to keep people employed, and still does.
GW: Changing pace, demand for Sharia-compliant investment solutions from an ever-increasing private wealth sector in the Middle East continues apace. What opportunities are Middle Eastern investors interested in, and why?
CR: Islamic investors have many of the same criteria as those who follow a strong ESG mandate. We have seen a developing appetite in the Middle East for a fund which meets shariah criteria, but which can be supported by a portfolio of green energy projects. We encapsulated this in the launch of our Premium Alziraea Fund early this year. Islamic investors like the consistent return renewable energy projects can provide, coupled with the strong social and environmental elements that come with them. Our lending partners were able in the case of Premium Alziraea to develop screening criteria for projects which could satisfy a shariah scholar.
GW: Part of private debt’s pitch has been that these products have been generating real yields for investors, but given inflation levels at the moment, this is often not the case. Everyone hopes that current inflation levels will recede but what are some of the concerns you’re hearing from LPs about private debt and what’s your answer?
CR: Investors always want higher yields, but it’s also a factor of risk and liquidity. We could probably lend money at 50% p.a. but the risk would be significantly higher and the ultimate exit may be longer and more complex. Private Debt remains an increasingly essential and complimentary alternative to traditional fixed income strategies but usually with superior risk adjusted returns and low volatility. We have seen throughout both the pandemic and more recently the war led inflationary environment that many risk assets have become significantly more volatile and correlated to each other.
GW: Lastly, Craig, a private debt bull would say that the asset class has now proven its resilience in the sense that it’s now endured two crises – the Covid-19 pandemic, and the current geopolitical turbulence – both of which are still ongoing. What’s the message to LPs that are yet to get on board?
CR: Private debt really grew out of the financial crisis in 2008; we launched our firm then, and the change we saw over the next 15 years was one of the commercial lending landscape transforming out of all recognition. This was partly down to the new regulatory requirements imposed on the major banks. It has created more opportunities for investors, and private debt has gone from being a niche part of alternative investment portfolios to a component one that ranks alongside infrastructure and private equity in terms of allocations. Investors also continue to hunt for yield; yes, we have higher inflation, but real yields are still very low. Preqin is forecasting that the private debt sector will continue to grow and will double in size by 2026. It is a very good place to be for both fund managers and investors.
Craig Reeves is Founder at Prestige Funds