Institutional investors were given another reason to consider emerging market private debt as an asset class this week after Cordiant Capital launched a $250m fund on Monday.
Cordiant’s fund will invest in senior secured loans for private sector borrowers in Africa, eastern Europe, Latin America and Asia. The firm plans to initially market its fund to insurance, pension and sovereign wealth funds.
The fund is expected to hit gross spreads of Libor of between 450bp and 650bp. This is up to 250bp higher than comparable loans in 2008, according to Cordiant. This should pique investors’ interest, particularly when compared to emerging market bonds, where yields are shrinking as money pours into the asset class.
But loans remain an unfathomable asset to many investors. Though they are less vulnerable to market sentiment than their bond counterparts, loans are much less liquid than bonds.
The banks, therefore, need to educate these new investors. They are in the unique position of having strong relationships with both borrowers and institutional investors, and it is up to banks to bridge the gap. Some banks, particularly those with the strongest footing in corporate lending, have already started the process. But it is a slow and thankless task for now, hindered by the fact that many institutional investors do not have a dedicated team to deal with this unfamiliar asset class.
To do so, banks will have to adapt their view of loans. Institutional investors do not care about historical relationships or accessing the borrower’s ancillary business, and will look to invest in loans for returns rather than for a future bond mandate. This will go against the grain of many loan bankers’ business sensibilities.
But banks should persevere, and some of the money that created last year’s $173.8bn CEEMEA bond market will find its way into the deal sheets of loans. Helpful, considering bank loans into emerging markets plummeted by $67bn last year, according to Cordiant.