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UBP Investors turn to private debt for yield

Colin Greene, Head of Private Debt, Union Bancaire Privée (UBP)
The world will breathe a sigh of relief as 2020 draws to a close and we look forward to 2021 with the real
hope that vaccines will bring the health crisis to an end. At the end of the year, many investors reflect on
the previous twelve months, review their portfolios and consider their investment allocations for the year
ahead. In 2021, and for years to come, we expect yield to be in short supply and, as we explain below, many
investors will turn to private debt for the yield component in their portfolios.

As investors plan their portfolios they would effects it has had on such aspects as consumer matters as never before. Large companies – even
do well to remember that Covid-19 has been behaviour, the economy, employment and levels highly indebted ones – can issue bonds at record
remarkable in how it has accelerated trends, of indebtedness. Suggestions that after the health low yields, whereas many SMEs will struggle to
including changes in how and where we work crisis we will “get back to normal” misunderstand raise financing.
and shop. Monetary policy and asset purchase the lasting impact of the pandemic.
plans have depressed yields in an effort to support Our preference is to align investments with the
heavily indebted sovereigns and corporates. There is no going back to the “normality” of trends accelerated by the pandemic. In the private
Negative yields are nothing new: yields first 2019, rather we will have a new “post-Covid-19” debt space, we have chosen to avoid lending
turned negative in Europe in 2015, but, as with normality. Think of Paris and Milan, two cities against Covid-19 headwinds. Our preferred
other trends, this has been accelerated by the which have accelerated the removal of cars sectors include social & affordable housing,
coronavirus. In early November, the global volume from their streets following lockdowns. For all the private rental sector (“PRS”), and financing
of negative-yielding debt reached a record level the personal, social and economic harm caused digital receivables. In addition to this, we are
of USD 17.05 trillion. We expect yields to remain by the pandemic, it may yet prove to be a turning exploring strategies in sustainability and green
low for the foreseeable future and yields in the point in the fight against climate change. The energy, which we believe will continue to benefit
public bond markets therefore to remain elusive. world has had to learn a difficult lesson in how as the world turns its attention from the virus to
a global threat can change our way of life. We climate change.
The health crisis is independent of the many are optimistic (but not complacent) that the
world will learn from We help to finance the development and
the Covid-19 crisis and construction of social & affordable housing.
that the fight against This sector is defensive and closely aligned with
climate change Covid-19. There is a greater social imperative
will shift up a gear to increase the supply of social & affordable
following the shared housing, and encouraging the construction
pain of the pandemic. sector is beneficial for economic recovery.
In the PRS, institutional investors, including
When investing in pension funds and insurance companies, are
2021 and beyond, acquiring apartment buildings. The PRS offers
let us be mindful of these investors positive yields and a hedge
the post-Covid-19 against inflation. We also help to finance the
normality, which will development and construction of apartment
accelerate growth in buildings that typically are sold to institutional
some sectors and investors before they are built. With improved
reduce it in others. payment technology and more online activity, we
Many companies are seeing interesting opportunities in financing
have become highly digital receivables, and we believe this will be a
indebted and may major theme in the coming decade.
struggle for years
under their debt We prefer to focus on those sectors and themes
load. The financial that have been accelerated by Covid-19 and where
markets have become we see interesting opportunities for yield in the
dislocated so that size private debt space.
1. Financial Times, 6 November 2020
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