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One Small Step for a Fund Manager, One Big Leap for Private Credit

Anders Bertramsen • 11 January 2021
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Interview with Anders Karsbæk Bertramsen, Head of External Products, Director, Nordea

When Nordea Asset Management launched its private credit fund of funds in December, it was one small step for the giant asset manager, and one big leap for the private credit world. “I think it shows that the private credit market is becoming more and more mature,” says Anders Bertramsen, the Head of External Products at Nordea Asset Management in Copenhagen. He adds, “The private credit markets has gone from being a niche to starting to be more mainstream. Private asset classes are too big to ignore.”

AndersThe creation of a fund of funds is a significant marker in the evolution of any market. When new markets start up, typically big investors put in small amounts, and a few small investors take a flyer. If these markets do well, it piques the interest of additional investors, but many are concerned about how to get into the market. That’s where funds of funds come in: They enable investors who are too small or too cautious to enter the market by acquiring an instantly diversified and professionally managed exposure to a market in one fell swoop. That’s particularly critical for the growth of the complex private asset market, Bertramsen says: “First of all, there’s no easy passive way to get exposure to this market. Additionally, if you’re not a big enough investor to take a position in a limited partner structure with a specific manager, it’s really hard to get access in this market. “We believe this product will provide a one-stop solution for clients who want to dip their toe in and allocate to private credit.”

The Nordea fund, called Nordea Global Private Credit Fund (SIF), is one of several private credit funds of funds that have been set up by various managers. Initially seeded by Nordea with 25 million euros, the fund is run by a team of four dedicated professionals, and Nordea has two staff members doing research. The fund “will be targeting a 7% net return,” Bertramsen says, “and provide a well-diversified exposure to private credit markets with quarterly liquidity.”

The hardest part of private market funds has been trying to square the circle by offering investors liquidity in a fund invested in illiquid assets. Bertramsen acknowledges that “the underlying liquidity” of the individual investments “does not match the overall liquidity” of the funds they’re in nor his fund of funds. But Nordea will manage this by having an initial two-year lockup and then only quarterly liquidity as well as by keeping a portion of the portfolio in short term private credit instruments.

Bertramsen is confident this can work because, “We have a private equity fund of funds which has a 10-year track record, and it has provided very nice returns for investors while maintaining liquidity and staying open-ended.” If anything, private credit offers more liquidity than private equity, he says, because “the investment period with some private credit is very short: You get payments almost from the day you invest.”

Still, Nordea, a major bank focused on the four Nordic countries, is a bit like the Vikings who sailed off into uncharted territories with no maps. First of all, there are a number of segments in private credit – from bank loans and mezzanine financing to distressed debt and trade finance – and there is limited knowledge about how to allocate among these segments. So, Nordea analysts will be focusing on segment by segment analyses of risks and returns. But for a fund of funds, allocation questions immediately lead to the second big question: How to pick the managers whose funds should go into the portfolio? “We tend to like managers who have a long track record in the private credit space,” Bertramsen says, “but to be honest, there aren’t that many of them.” So, what to do? “We look at the underlying deal statistics because that’s the only way you can get a sense of the managers’ capabilities.” The third big issue is benchmarking. The issue here is apples and oranges: Private credit “managers are not particularly similar, so benchmarking is really difficult,” Bertramsen says. Here too, Nordea is developing some rules of thumb.

Whatever the market’s shortcomings, Bertramsen says this is private credit’s moment, and therefore the moment for funds of funds. With central banks explicitly committed to lower for longer, fixed income investors have been searching high and low for yield, and that has led many to pile into private credit. Moreover, “you also see a lot of new managers coming online,” he notes, “so you see increases in both supply and demand.” Even as total investment in private markets climbs, Bertramsen says, “We think there is still a very significant market that is still pretty much untapped.”

But as investors pile in, isn’t there a risk of too much money chasing too few deals? Could be, Bertramsen says: “The asset class as a whole is in danger of being overheated.” But, he argues, that’s all the more reason why would-be investors need the kind of professional guidance funds of funds seek to offer.

Because of the burgeoning growth in private markets, Bertramsen says there will probably be more private credit funds of funds, and the next iteration of funds of funds may be focused more tightly on using only managers who specialize in a specific segment of the private credit world. But this kind of increasingly fine slicing and dicing is also a standard next step as markets develop.

Bertramsen is aware there’s another standard marker in the evolution of many markets: After investors get acclimated, some start disintermediating funds of funds, figuring why pay an extra level of fees when they can navigate the market on their own. But that takes a long time, particularly, in a market like private credit that is full of non-standardized instruments. In any case, smaller investors will always need a fund of funds for diversification and portfolio management. So, Bertramsen isn’t worried.

As his new fund of fund gears up, Bertramsen describes the state of private credit markets using Winston Churchill’s well-known categorization: The market is not at the beginning or at the end, but, now that it has several funds of funds, he says, “Maybe we’re at the end of the beginning.”

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