Demand for Private Debt Creates Crowded Market

Institutional investors’ interest in mid-market corporate direct lending is driving large capital flows into a squeezed portion of the market, according to Willis Towers Watson, resulting in downward pressure on returns and greater risk.

Willis Towers Watson has published a new report, “Finding Value in Private Debt,” underscoring the challenges facing institutional asset owners when it comes to finding compelling opportunities in private debt.

According to the report, adoption of private debt has become more widespread among asset owners, with assets allocated to credit strategies more than tripling between 2007 and 2017. However, Willis Towers Watson researchers believe that investors are placing too much focus on mid-market corporate direct lending, “thereby missing out on opportunities in less competitive parts of the market that could offer greater return outcomes.”

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“The private debt market has grown substantially in a relatively short space of time and continues to do so in an increasingly diverse manner,” explains Chris Redmond, global head of credit and diversifying strategies at Willis Towers Watson. “As the market widens, its complexities become more difficult to understand, with the majority of institutional investors continuing to concentrate their activities on mid-market corporate direct lending.”

The report suggests one main result is large capital flows into a squeezed portion of the market, creating downward pressure on returns and upward pressure on risk.

“With this portion of the market demonstrating signs of deterioration in future return potential, Willis Towers Watson believes that investors must make sure they continue to direct capital toward areas offering the best risk-adjusted returns,” the report warns. Adding to the issue, Willis Towers Watson finds there is “a tendency for managers to focus on ideas that can be quickly raised, are scalable and profitable to run—which ultimately results in them flocking toward very similar opportunities.”

Redmond points to better opportunities in smaller niche strategies, which are harder to scale and typically offered by specialist managers.

“These are often the most compelling, particularly when faced with higher valuations such as those we see in most credit markets today,” he explains. “Investors who are willing to pair with specialist lending teams in specific geographies and assets are ultimately going to derive the greatest benefit in the long term. Similarly, investors’ willing to embrace complexity and revisit asset classes tainted by prior poor performance are also likely to be well rewarded.”

One other challenge identified in the report is that many investors are unwilling to be a first mover into markets that have experienced historical performance issues.

“U.S. residential mortgages are a great example of this,” Redmond concludes. “It’s a sector that we believe has demonstrated improved fundamentals while delivering excellent performance, both on an absolute and risk-adjusted basis.”

The full report is available for download here.  

Half of Workers Approaching Retirement Expect to Return to Work

Earning additional income is their primary reason why, a survey found.

Fifty-three percent of workers who expect to retire in the next five years think it is likely they will return to work, according to a survey by Home Instead, Inc.

Earning additional income was their primary reason for returning to work, cited by 67%, followed by fighting boredom (44%) and keeping their minds sharp (22%). Sixty-eight percent of those approaching retirement say they plan to work in a different industry, and 65% of retirees who have returned to work say the same.

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“Today, more aging men and women are redefining what their next chapter looks like, seeking out new career opportunities that serve their skills, passions and life goals,” says Jeff Huber, president and CEO of Home Instead, Inc. “We are seeing the desire among seniors for a second career to not just fulfill a monetary need but source of personal fulfillment later in life. In fact, many of our professional caregivers are seniors themselves.”

Nearly 80% of those nearing retirement or who have retired and returned to work say they would like to make a meaningful impact in their communities in their post-retirement years, such as through volunteering, caregiving, teaching or giving back.

Catherine Collinson, CEO of the Transamerica Center for Retirement Studies, says that with people living longer, retiring at age 65 is an outdated hallmark.

“With Boomers blazing the way, full retirement is no longer a point in time,” Collinson says. “The transition could be a decade or more and involve shifting gears and working in a different capacity or finding a flexible arrangement, all with more time for family.”

Home Instead, Inc. says that some of the most popular jobs for retirees are retail sales clerks, bank tellers, online tutoring and caregiving.

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