The case for private debt

Opportunities in impact investing

By Michiel Adriaanse – Head of Sustainable Investments Sales EMEA

While family offices have led the way in acknowledging that financial performance and principles can go hand-in-hand, institutional investors are increasingly looking at impact investing. Impact investing does not need to be confined to a small alternative asset class bucket within one’s portfolio. Through private debt impact investing, it can become a core component.

 The idea of impact investing through private debt funds may well be new to some institutional investors in the Netherlands. Yet this approach possesses plenty of traits found in other private debt asset classes – foremost among them low correlation with equity markets, connected to real assets and the ability to deliver competitive returns.

What sets private debt impact funds apart is that they have a specific environmental or social goal. In other words, they are not designed only to meet investors’ financial objectives – they can also offer a fundamental way to select investment themes with a long-term positive outlook.

These themes benefit humanity as a whole by helping to fulfil some kind of basic need – for example, clean air, clean water, food or shelter. Such a focus can help protect private debt impact funds from market shocks and therefore enable them to sustain long-term growth. Anyone searching for proof need look no further than the field of microfinance debt, the most well known private debt impact investing asset class, which has an excellent track record as reflected by the 14-year old Syminvest index.

Since many private debt impact funds are in the business of lending directly to emerging markets, some de-risking may be necessary to achieve competitive risk-adjusted returns. With this in mind, our funds employ approaches such as adding a first-loss tranche, introducing credit enhancements, hedging FX risks for emerging market currencies and enhancing scale to improve diversification.

It is also important to ensure that private debt impact funds are packaged as debt vehicles. They should have a true debt risk profile and should not be disguised private equity funds.

We expect institutional investor interest in private debt impact funds to increase further as this universe continues to grow in both size and sophistication. As an acknowledged pioneer in the sphere of sustainable investing, Deutsche Asset Management is well placed to ensure that this asset class serves to benefit investors and, just as importantly, the wider world.

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