Newmarket CIO spies $200tr private debt win
Institutional investors are on the verge of a huge opportunity in private debt, as assets migrate out of the banking system, according to Thierry Adant, who joined Newmarket Capital this week as its chief investment officer.
The Philadelphia-based alternative asset manager founded by Andrew Hohns hired Adant from Willis Towers Watson, the risk management and insurance broking group, where he was head of private debt.
He will lead Newmarket’s investment process, shape its investment philosophy and “cultivate new and additional pathways for institutional investors to gain access to innovative and impact-oriented alternative investments”, the firm said in a statement.
“There are a few verticals I can help build and move them up a little,” said Adant. “Private debt is a huge opportunity. We’ve entered a transition period, partly catalysed by Covid, but also by global challenges that bring immediate risk and huge opportunities to mobilise capital for good.”
Newmarket was set up in June as a spin-out from Mariner Investment Group, as GlobalCapital reported. So far, it comprises the International Infrastructure Finance Co fund platform, which Hohns had started at Mariner, the New York hedge fund, in 2012.
The IIFC’s niche is synthetic risk transfer securitizations, specialising in more complex assets such as infrastructure loans. It combines this with an intention to achieve positive environmental and social impacts where it can. The IIFC has been the lead investor in risk transfer deals with Crédit Agricole and Société Générale, in which capital was recycled to support green assets.
It is also the most prominent player in the nascent field of securitizations by multilateral development banks. In 2018, the IIFC bought the mezzanine risk on a $1bn portfolio of the African Development Bank’s loans, freeing up capital so the AfDB could make $650m of fresh loans.
Newmarket is continuing with the IIFC work, which it expects to grow as banks will have heavy capital needs. But Hohns said in June that the firm wanted to “explore many other strategies — there is huge potential for using securitization in the impact space. It will not all be impact-oriented, but impact will be at the top of the agenda”.
Adant (pictured) brings experience of a wide variety of secured and unsecured debt classes. At Willis Towers Watson, he was responsible for asset allocation and due diligence of private debt investments globally, including over $4bn a year of corporate lending, commercial and residential mortgages, infrastructure and other specialised asset classes.
Adant also “sourced and executed a number of impact investments,” Newmarket said. Willis Towers Watson had been a client of the Newmarket team.
“Private debt in its lifecycle is very much in the early innings,” Adant said. Before 2008 there were loan funds and some commercial mortgage activity.
“Post-crisis, middle market loan funds have raised a lot of money — it’s now the second largest alternative asset class,” Adant said. Private debt funds have been estimated to have about $1tr of assets. But this is dwarfed by what Adant sees as “the $200tr potential”.
That is his estimate of all the private credit assets — from mortgages to loans to leases, to the corporate, government and household sectors — most of which are now held by banks, but all of which could in theory be open to institutional investors.
With yields at historically low levels, Adant is eager to get more institutional capital into those assets. “For institutional investors now, you can go to the public markets and accept the returns there, which are at historically low levels across the globe,” he said. “If you don’t look beyond you will be subject to low prospective returns and elevated risk. That might be fine if you can lower your expectations for returns. I would challenge it, and say ‘look at less liquid markets such as private debt’.”
He conceded that this could in some cases carry higher credit or liquidity risk, but he pointed to infrastructure debt as an example — “it tends to be much lower risk than equivalent public debt. That illiquid loan is a better loan.”
Adant went further: “Public markets are shrinking. All the innovation is happening in private markets. Public markets are not feeling the advantage of all the juice disruptive companies are creating.”
He argued banks’ private loan books performed much better than the public debt they distributed.
“There are a lot of barriers preventing capital flowing quickly,” Adant said, pointing to regulation, education and familiarity.
Regulators were “making assets like infrastructure less appealing for banks”, he said. “We strongly believe capital markets should play a bigger role. You’ve seen the back and forth in Europe about securitization, which is now being discouraged. But there are other ways to encourage lending outside banks. How do we bring assets outside and create non-bank lenders? There are certain loans that don’t fit well in banks — they should be done outside a regulated environment.”
This included new types of asset, he said, where private markets should bear the risk, or those where more speed or leverage was needed.
Although insurance companies were the main group of institutions in private debt, regulation had also constricted their ability to invest, he said.
However, Adant does not see private debt as problem-free. “One of the things I’m expecting to see going into 2022 is disappointment in middle market loan funds,” said Adant. “We will not see deeply negative returns, but we will see some things not work. We are starting to see restructurings. The stats don’t hit the headlines because they are private. All you can see is the level of bankruptcies, but some are just restructured out of court. But it’s happening — you see a lot of amendments, waivers. The problems will linger for 12 to 18 months, and suddenly your 7% to 12% return is more like 5% or 0%.”
This was a necessary process, he arged. “Capital markets need things to fail as well. That’s the cleaning mechanism. We need the good actors to succeed and the bad actors to fail.”
Newmarket wants to play in this space, in new ways. At the same time, “we want to be known for creating positive impact as we go along,” Adant said.
One area the IIFC has already invested in, and where Newmarket sees more opportunity, is US affordable housing.
Adant estimates demand exceeds supply by five times. Policies such as Low Income Housing Tax Credits help preserve and expand the stock of affordable housing but other solutions are needed, Adant argues.
“A lot more people need housing and cannot afford market rents,” he says. “To us it seems — how do we find a way to invest in US affordable housing so these people can have homes, which current actors have failed to deliver? We need to find a different capital structure, and we are working on that.”
Newmarket is also interested in energy efficiency, where, with the right financing package, customers can procure devices that are greener and save them money.