The next phase for private credit markets

The resilience and adaptability of the asset class during the ongoing pandemic has helped to cement private credit’s permanence in the minds of strategic asset allocators. In this paper, M&G Investments reflects on the changed, and changing, landscape for private credit investing, and offer a perspective on the multi-faceted role private credit could have in helping to finance the post-pandemic recovery, and support many of the changes the world needs over the longer term. The paper also focuses on some of the key themes influencing private credit today and discusses what the coming five to ten-years could have in store for the growth and development of the diverse and dynamic private credit markets and what this could mean for investors.

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For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within. This guide reflects M&G’s present opinions reflecting current market conditions. They are subject to change without notice and involve a number of assumptions which may not prove valid. The distribution of this guide does not constitute an offer of, or solicitation for, a purchase or sale of any investment product or class of investment products, or to provide discretionary investment management services. These materials are not, and under no circumstances are to be construed as, an advertisement or a public offering of any securities or a solicitation of any offer to buy securities. It has been written for informational and educational purposes only and should not be considered as investment advice, a forecast or guarantee of future results, or as a recommendation of any security, strategy or investment product. Reference in this document to individual companies is included solely for the purpose of illustration and should not be construed as a recommendation to buy or sell the same. Information is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While M&G Investments believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. All forms of investments carry risks. 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Fiona Reynolds, chief executive of the PRI, provided an update investors on the COP26 meetings including the key considerations of “finance day”.

Speaker

Fiona Reynolds is the CEO of the Principles for Responsible Investment (PRI) and has responsibility for its global operations. The PRI is a U.N. supported organisation, with more than 2,000 signatories who collectively represent over US $80 trillion in Assets Under Management. The PRI is the major global organisation for responsible investment practices and leadership and the integration of environmental, social and governance issues across the investment chain. The PRI’s mission is to create a sustainable global financial system and the organisation aims to bring responsible investors together to work towards creating sustainable financial markets that contribute to a more prosperous world for all. Appointed in 2013, Fiona has 25 years’ experience in the financial services and pension sector, Fiona joined the PRI from Australian Institute of Superannuation Trustees (AIST), where she spent 7 years as the CEO, working within the Australian superannuation sector and played an active role in advocating pension fund policy and participated in a number of government committees and working groups on superannuation and retirement incomes policy. Fiona also serves on the Board of the U.N. Global Compact, she is the Chair of the Financial Services Commission into Modern Slavery and Human Trafficking (The Liechtenstein initiative), which has been developed by the United Nations University Centre for Policy Research (UNU-CPR) and supported by the Government of Liechtenstein and. Fiona is also a member of the International Integrated Reporting Council (IIRC), the Global Advisory Council on Stranded Assets at Oxford University, the UN Business for Peace Steering Committee, the Global Steering Committee for the investor agenda on climate action and the Steering Committee for Climate Action 100+ which is the largest ever investor engagement with listed companies. Fiona has been a member of the UK Government Green Finance Taskforce. In 2018 Fiona was named by Barron’s magazine of one of the 20 most influential people in sustainability globally and by the Australian Financial Review of one of Australia’s one hundred women of influence for her work in responsible investment globally. Fiona has formerly been a pension fund director/trustee of AUSfund and been on the boards of Industry Funds Credit Control, Australia for UNHCR, the Australian Council of Superannuation Investors and the National Women in Super Network. In September 2012, she was named by the Australian Financial Review as one of Australia’s top 100 women of influence for her work in public policy.

Moderator

Tate has been an investment industry media publisher and conference producer since 1996. In his media career, Tate has launched and overseen dozens of print and electronic publications. He is the chief executive and major shareholder of Conexus Financial, which was established in 2005, and is headquartered in Sydney, Australia.

The company hosts more than 20 conferences and events globally each year and publishes three digital publications, including the global website and strategy newsletter for global institutional investors Top1000Funds.com, Professional Planner for financial planners, accountants and private bankers in Australia and Investment Magazine for Australian superfunds and institutional investors. One of the company’s signature events is the bi-annual Fiduciary Investors Symposium attended by global asset owners and hosted in the Americas and Europe.

Conexus Financial’s events aim to place the responsibilities of investors in wider societal and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes.

Tate served for seven years on the board of Australia’s most high profile homeless charity, The Wayside Chapel; and he has underwritten the welfare of 60,000 people in 28 villages throughout Uganda via The Hunger Project. In 2021 was appointed as a Member (AM) of the Order of Australia (General Division) for significant service to the community through charitable initiatives.

Anne Simpson, managing investment director, board governance and sustainability tells Amanda White why transparency is so important at CalPERS and what the fund is doing to improve it.

“Sauce for the goose is sauce for the gander,” says Anne Simpson CalPERS’s managing investment director, board governance and sustainability.

She’s talking about how the fund needs to hold its own team, and its processes, to account in the same way it does the companies it invests in, specifically when it comes to corporate governance and the role of transparency.

“The whole issue of transparency is relevant to accountability which is important to performance,” she told Top1000funds.com in an interview. “That is our intuition, we see the evidence of that in corporate governance, so the question is how does that play out for investment governance.”

As the largest pension fund in the United States, CalPERS was one of the five funds reviewed for the Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and CEM Benchmarking. The GPTB looked at the transparency of disclosure across four key areas that were determined as driving value: cost, governance, performance and sustainability. The launch of the benchmark, in February 2021, has prompted a number of funds to look more closely at their peer group and what innovation is needed to be a leader in transparency.

“The benchmarking project is important as it acknowledges that governance matters whenever there is an exercise of power. We take it as a fundamental purpose of a pension fund to look after other people’s money. The governance questions look at our own transparency and accountability and ensures performance is as good as it can be,” she says.
Simpson says as fiduciaries it is important for pension funds to understand leading practice and improve, and that the benchmarking process was valuable in gauging best practice relative to peers.

“What came out of benchmarking was incredibly valuable, one of the things we learned was just because the information has been presented to the board doesn’t mean it is in a practical published form that can be absorbed by other stakeholders.”

As a public fund CalPERS has a huge deal of transparency and publishes “99% of everything going on” including via a Youtube channel. There are some exclusions around market issues, confidentiality around any litigation and personnel matters.

“We are a full force on transparency, we are eating our own cooking, walking the talk,” Simpson says. “We had assumed the information in the public domain, like board papers, would be accessible. But the GPTB looked at published documents because that is where people find information. We are taking that back and saying we have all this information you can retrieve it but it’s not in a published form. We are being fully transparent but another step for us to take is for it to be accessible. Taking this assessment very seriously, we can change things and find the feedback helpful.”

While the process has been important and change is afoot, the fund is also cognisant that any new reporting frameworks are resource intensive. For example in sustainability alone it already does a TCFD report, a GRI report and the PRI report. It also signed up on a voluntary basis to the Council for Inclusive Capital which is a set of reporting principles for the entire enterprise, such as an internal childcare centre, not just what is in the portfolio.

It also has legislated reporting criteria such as those around Northern Ireland and emerging managers.

“A new framework is not trivial for us but this transrparency benchmark process made us more sensitive to the fact that we disclosed some things but is that being transparent, is it easy to find the information?”

“I dream of a common language, a reporting format for investors that is searchable and people can retrieve standardised metrics. But we are a long way from that,” she says.

 

Investors are constantly looking at what the next drivers of growth will be, where they will be located, and who will benefit from them. Technology is enabling growth across the world, but what differentiates the hundreds of companies headed for mediocrity or failure from the few that will excel? And how much more room is there to grow?

Speaker

Mark B. Baribeau, CFA, is a managing director, the head of global equity, and a global equity portfolio manager. He joined Jennison Associates in April 2011. He was previously with Loomis, Sayles & Company for more than 21 years, where he was lead portfolio manager for the global equity opportunities strategy, beginning in 2004. In addition, he managed large cap growth portfolios from 1992 to 2010, serving as lead manager from 1999 to 2010. Prior to his tenure at Loomis, Sayles & Company, Baribeau was an economist at John Hancock Financial Services. He received a BA in economics from the University of Vermont and an MA from the University of Maryland. He has a CFA designation and is a member of the Boston Security Analysts Society and the National Association of Business Economists.

Moderator

White is responsible for the content across all Conexus Financial’s institutional media and events. She is responsible for directing the bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts, as well as promote the long-term stability of markets and sustainable retirement incomes. She is the editor of www.top1000funds.com, the online news and analysis site for the world’s largest institutional investors. White has been an investment journalist for more than 20 years and has edited industry journals including Investment & Technology, Investor Weekly and MasterFunds Quarterly. She was previously editorial director of InvestorInfo and has worked as a freelance journalist for the Australian Financial Review, CFO, Asset and Asia Asset Management. She has a Bachelor of Economics from Sydney University and a Master of Arts in Journalism from the University of Technology, Sydney. She was previously a columnist for the Canadian publication, Corporate Knights, which is distributed by the Globe and Mail and The Washington Post. White is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program consists of 22 fellows and seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

Poll results

To follow

Which secular theme do you think is most compelling?

CalSTRS has been a leading light in ESG integration in the US but its board has been slow to adopt a net zero pledge, with internal debate centred around the most motivating factors to achieve net zero. Now it’s made the pledge it will spend the next 12 months mapping the path to achieve net zero. Amanda White spoke to head of sustainability, Kirsty Jenkinson.

The board of the $311 billion CalSTRS, has made a commitment to net zero by 2050 but the fund will take a year to figure out the plan on how to get there.

CalSTRS is one of a handful of pension funds in the US which has had a long-term commitment to ESG, and since 2004 it has invested in climate-oriented solutions and integrated climate risk considerations into its investment and stewardship activities.

Kirsty Jenkinson head of sustainable investment and stewardship strategies at CalSTRS says there was a debate internally whether a pledge to net zero was helpful, or not, in terms of the impact on climate.

“We have been working on how to integrate ESG and climate risk in a gradual progression since 2004. Since 2015 and the Paris Agreement we have accelerated how to mitigate the risks and look at the opportunities around climate,” she told Top1000funds.com in an interview.

“We debated whether it was helpful to have a pledge or not. We were clear we need a path forward. The commitment now sets us on a path alongside all the other players in the global economy. It’s our north star and helps us work backwards on things we need to do to get to that north star.”

The path to net zero is not new to CalSTRS but Jenkinson, and others, had some reservations about whether a pledge would be the most appropriate motivational force for the investment team. In the end the board felt comfortable the pledge was a necessary step to take, not least because it meant a commonality in the trajectory alongside other investors.

“We really looked at whether the pledge would it be helpful or hindrance to motivate the investment professionals. It felt like jumping on a bandwagon that was going 100 miles an hour – was that a good thing or not?

“We decided this is the moment, it is about having a common trajectory. And part of us being successful depends on everyone else.”

The fund announced its pledge last month but has also committed to a 12-month period of deliberation around the plan, including interim targets, on how to achieve net zero.

“We need work on the accountability we need to hold ourselves to. It is the same as we are engaging the companies we invest in, set strategic targets and goals and then the plan to achieve them.”

Allowing a year to develop a strategic plan around the commitment gives CalSTRS the chance to “make good choices as an organisation” Jenkinson says.

A governance structure has been established with a focused team committed to the plan that includes CIO Chris Ailman, deputy CIO, Scott Chan and the heads of investment divisions.

CalSTRS has invested in a low-carbon public equities equities index since 2016 and in 2017 it excluded thermal coal.

In 2019 the fund set out its investment beliefs which included climate change as a risk, and set out a multi-year low-carbon transition workplan, but even two years ago “net zero” was not part of common parlance.

“This meant we would be more systematic about how we understand the low carbon transition of the economy, the transition and physical risks and how to educate the board and staff,” Jenkinson says.

The portfolio that Jenkinson manages, the Sustainable Investment and Stewardship Strategies, aims to be a catalyst in transforming the financial markets to focus on long- term value creation that fully integrates sustainability considerations and uses CalSTRS’ influence as a significant global investor to promote sustainable business practices and public policies. That portfolio was recently expanded to include both public and private assets and make up 5 per cent of the fund.

“Part of the evolution to make the pledge was the need to expand our activities in this area because the world is changing around us,” she says. “We will determine how we prioritise across asset classes but we are clear we are taking a whole of fund approach.”

While CalSTRS was already focusing on risk and investing in solutions, the net zero pledge focuses plans on structurally integrating net zero into its portfolio plans.

Measurement will be the initial focus of the plan, with carbon footprinting of public assets already complete a a year ago the next effort will be on private assets.

 

 

 

As investors continue to demand  more reporting around social impacts, Canada’s mining sector grapples with how to provide investors with more transparency on indigenous relationships.

Investors need more sight of how mining groups in Canada are working with the country’s 600 indigenous communities. Indigenous communities are an important source of labour to the industry with many mines and projects located on traditional lands, yet investors struggle to assess “the quality and sincerity” of mining groups’ relationships with indigenous groups.

According to a recent roundtable between the Mining Association of Canada (MAC), indigenous groups and institutional investors to discuss how the industry should engage with indigenous communities, investors typically engage directly with mining groups regarding their indigenous relationships but have limited tools or KPIs to assess governance around these often complex relationships.

For example, operating jurisdictions vary and there is a lack of common indicators guiding the relationship between mining companies and indigenous groups. Useful metrics should include the percentage of indigenous representation in the organization’s workforce across senior management; the number of indigenous suppliers and contractors and financial commitments to communities surrounding projects.

Nor do any of the main ESG frameworks like the Global Reporting Initiative, SASB or the Task Force for Climate-related Financial Disclosures (TFCD) have a particular focus on corporate indigenous relationships. In contrast, MAC’s ‘Towards Sustainable Mining (TSM) Indigenous and Community Relationships Protocol’ offers a framework for more transparency in assessing mining groups indigenous and community relationships.

Moreover, TSM offers the ability to benchmark between peers, independent assurance and strong indigenous involvement. It offers a scoring system that investors can use to quantify the quality of a company’s approach to building and maintaining strong relationships with its affected indigenous communities.

“Challenges remain for investors to evaluate the quality and depth of indigenous relations,” says the report. “Corporate disclosures that provide context around varying metrics on this topic will provide increasing value as investors grapple with how to evaluate and value these relationships over time.”

The roundtable also focused on research from the Corporate Social Responsibility Initiative (CSRI) that illustrates how strong partnerships between mining companies and indigenous communities help avoid costly breakdowns in relationships. The CSRI study found that the most frequent costs were those arising from lost productivity due to delays or shutdowns. With the growth in responsible investing and the integration of ESG issues into investment analysis, there is an increasing need for investors to understand and assess these potential risks.

Regulation

Good relationships between investee companies and indigenous communities are even more important given tightening Canadian regulation. Regulation was strengthened in June 2021 when an act respecting the United Nations Declaration on the Rights of Indigenous Peoples received Royal Assent and came into force in Canada. It establishes accountability and minimum standards for indigenous people through 46 articles, covering issues such as injustices, equal rights, self-determination, and rights to traditional lands, while promoting mutual respect and partnerships.

This new legislation requires the federal government, in consultation and cooperation with indigenous people, to take all measures necessary to ensure the laws of Canada are consistent with UNDRIP and to develop an action plan to achieve UNDRIP’s objectives.

Partnering with indigenous communities often chimes with broader corporate environmental governance.

“Indigenous concerns relating to the environment are broad and include a wide spectrum of considerations which go beyond climate change, such as dust on the snow, the impact on wildlife and icebreaking activities to name a few,” said Matthew Pike, Aboriginal Affairs Superintendent at mining group Vale.

In fact, indigenous skills and knowledge can help mitigate climate change and environmental risks. Environmental concerns raised by indigenous communities are valid risks that a company should take into consideration in their project evaluation. Engaging with indigenous communities is not only the right thing to do, but it may also create value for an organisation, by providing access to local talent, local businesses and suppliers, maintaining a social license to operate in challenging jurisdictions, and building long-term partnerships.

Finally, the roundtable touched on how investors should look to mining groups’ senior executive team and board of directors to create the appropriate culture to execute a long-term strategy regarding indigenous relations.

That requires the inclusion of indigenous voices throughout a company’s operations, engaging and maintaining conversations around the use of indigenous lands, providing training and employment for local communities, fostering business relationships with local suppliers, and educating management and employees on the history of indigenous peoples.