The days when the ESG section of an RFP would be an afterthought are long gone. We believe that private market participants are in a privileged position to drive change and more lender-friendly terms should help the push for ESG in 2021.
In December 2020, we asked our experts for their predictions on the five key questions the global economy faces as we enter the second year of the pandemic.
Here Nicole Downer offers her thoughts on the key factors driving the investment environment in 2021.
The Search for Yield
The search for yield has been prominent since the global financial crisis in 2008, and we only expect this to intensify given global rate cuts in response to the ongoing Covid-19 crisis.
For example, in the UK insurance industry asset allocators have fairly defined and expected liabilities. To meet these liabilities, insurers have traditionally allocated to government debt. Given the conditions of the last ten years, they have moved down to high-rated corporate bonds.
However, now that they are not paying the desired yields, we are seeing an increased turn to private market allocations as they typically return more as a function of the illiquidity premium. We expect this trend to continue into 2021.The Mainstreaming of ESG
Whilst this year has been unquestionably difficult, it has it has accelerated the mainstreaming of ESG. It has now moved to the forefront of both investors’ and fund managers’ minds.
The days when the ESG section of an RFP would be an afterthought are long gone. We believe that private market participants are in a privileged position to drive change and more lender-friendly terms should help the push for ESG in 2021.Appetite for Private Assets
As a private debt manager, we have seen its growth first-hand since we opened in 2000.
When we launched our first fund, private debt was a niche, with fewer than $100bn in AUM. Now it is over $800bn*.
This is partly due to banks retreating from the asset class following the increase in regulations after the financial crisis. We expect this to continue as regulators place more scrutiny on the banking model. If anything, the search for yield has only intensified and private assets typically pay more than their public equivalent.
Also, certain asset allocators have not been able to access private markets due to their own specific requirements and regulations, with the UK DC market a good example. We expect managers to develop innovative ways to give them access to the private markets.