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Investing in uncertain times

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Everyone wants to invest in private markets.

For many years low interest rates were a key challenge for portfolio managers and risk managers alike. The search for yield was pushing investors to keep searching for new investment opportunities outside their traditional asset classes.
Investors are experienced to identify the right investments and assess, whether returns and risks match. Investing in Alternatives – typically private markets – holds some specific challenges, though: Illiquidity combined with long durations on the one hand and risk assessment/market valuation of non-rated assets- on the other hand.

Challenging times for investors

As if those challenges weren’t enough: first Covid and then political crises hit the markets. Disturbed supply chains, threats of energy shortages and inflation combined with raising interest rates are driving fears of recession. How stable will the economy prove to be? When will we see an increase in defaults and to what extent? And, hey – what about climate change?

Alternative Investments are here to stay.

Rising bond yields and the denominator effect have pulled many investors back into traditional asset classes. Are Alternatives on their way out? No. Its characteristics match the demands of long-term investors, who – unlike bank lenders – generally have no problem to deal with illiquidity and long durations. They are willing to pocket the associated premiums. Besides that, Alternatives have a positive effect on portfolio diversification and its risk-return-ratio is still sound. But, most and foremost: transition of our economies towards a more sustainable growth needs funding. Big time. And while banks continue to retreat or decrease their engagement, investors are willing to fill the gap. So Alternatives are here to stay.

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Dedicated modules for a range of fields

Corporate Debt

Corporate lending traditionally has been the domain of banks. Due to harsher capital requirements banks are more and more retreating of their once core business segment and leave the field clear for other players. Institutional investors are filling the gap as the asset class has been offering attractive returns combined with solid credit ratings. Also during the recent turbulences Corporate Private Debt was performing generally well, whereas public markets were to a large extent non-existent.
While the market potential is huge – many companies are seeking funding for investments and their transition towards a more sustainable economy – risks for lenders are increasing.
Though floating interest rates promise attractive yields also in times of rising interest rates, the question is how long companies can bear these increasing costs of capital. In combination with a struggling economy at the brink of a recession, after many years with low default rates, creditworthiness is becoming a tangible risk again.

Acquisition Finance

The LBO market offers ample opportunities for investors, as more and more banks are retreating from what used to be their domain. Tightening banking regulation increases their capital costs and makes funding less attractive. Due to its historical banking dominance the LBO market offers rather strict covenants and conservative transaction characteristics – traits that make it attractive from a risk perspective.

Infrastructure Debt

The transition towards a climate-neutral economy will take generations – and the European Green Deal alone requires hundreds of billions of investments in segments ranging from renewable energy to transportation and buildings. Investments that will require private actors.
And while investment opportunities in infrastructure are abundant, its characteristics – illiquidity, long durations and stable cash-flows also in volatile markets – fit very well with investors’ requirements, in particular those of life insurers.
No surprise, thus, that infrastructure debt plays an important role in the portfolio mix of institutional investors. However, infrastructure debt is also a complex asset class. And whereas illiquidity and long durations promise extra returns they also highlight the importance of a thorough and reliable risk assessment as integral part of the investment decision.

Real Estate

Our lives are centered around building. But buildings also are one of the main contributors of CO2-emissions globally. Building more sustainable and improving the energy efficiency of existing buildings will require enormous (financial) efforts. We also have to adopt buildings to a progressing climate change and ageing societies.
Since real estate is an asset class that most investors have extensive experience with, they are a natural fit for providing the necessary financial resources to support this transition.

Traditional fixed income

Fixed income investments are the backbone of many institutional investors’ portfolios, in particular insurance companies. And while they are well covered by external rating agencies, regulation requires investors to not rely on external expertise but perform additional internal risk assessments. These challenger assessments are in particular relevant for directly held investments.
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ESG

Assessing not only the credit risk of investments but also their performance with regard to environmental, societal and governance dimensions is becoming the new normal. Thanks to tightening regulation we are likely to see ESG scores going through a similar development as traditional credit ratings – i.e. from largely qualitative, expert based judgements based on methodological freedom towards quantitative, standardized and highly regulated assessments. Another similarity to credit ratings: ESG scores from external data providers will not be available for private markets - putting risk departments under pressure to comply with regulation and handle both assessments and model development.

EU-Taxonomy

In the finance sector’s role to contribute to the achievement of EU climate goals the EU-Taxonomy plays a central role. In order to comply with disclosure regulation, institutional investors have to assess all of their investments with regard to the extensive and still growing Taxonomy. And not despite, but exactly because of its high level of detail, correctly adhering to the Taxonomy is a huge challenge. Not only are the decision-trees for the numerous economic activities highly individual, the entire process needs to be audit-proof, too.

Unlock the full potential of your investments! Contact us:
info@rsu.one or call +49.(0)89.442340-0

“We’re very pleased to have found a capable and reliable partner in RSU, whose tools provide valuable support in our risk management process.”

Florian Stärk, Head of Asset Pricing & Analysis – MEAG

“Our internal rating processes, powered by RSU, help us make precise statements on companies’ creditworthiness, enabling portfolio managers to make much better risk assessments in the course of the issuer selection process.”

Dr. Peter Andres, Chairman of the Management Board – SIGNAL IDUNA Asset Management GmbH

“In addition to attractive returns, which are certainly important, above all we seek to ensure an appropriate risk-return balance. RSU’s systems play a key role in assessing the risks associated with our investment decisions.”

Head of the Credit Office – Ampega Asset Management GmbH

“After intense scrutiny, we found a reliable partner in RSU. Their processes have proven their worth over the years.”

CIO and Head of Infrastructure Debt – Allianz Global Investors

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