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The role of alternatives in a changing world

22/04/2021

2020 was a year like no other. While it was characterised by the tragic humanitarian impact of the pandemic, it was also a year where investors started to truly see that the way we allocate our capital plays an increasingly important role in tackling the social, environmental and humanitarian issues of our time, even in private markets.

The new lower for longer interest rate environment further reinforced the appetite from institutional clients for alternative assets. Private Debt & Alternative credit is a segment that offers solutions to our clients’ investment challenges, namely access to yield, both in relative and absolute terms, enhanced diversification and downside risk mitigation.

Today, private debt is the third largest private asset class behind private equity and real estate, and we believe this trend is here to stay. As always, diversification is key, and we believe this can best be achieved with a manager that has the size and expertise to identify relative value and source deals and build diversified portfolios across the different segments of private debt and alternative credit.

This growing appetite is noticeable in almost every private debt segment:

  • Commercial Real Estate (CRE) debt, which can provide attractive returns, diversification and low risk, while being appealing in a Solvency II framework.
  • Infrastructure debt, which combines high visibility on future cash flows, low defaults rates, income generation with a pick-up versus listed instruments and a strong diversification effect due to the wide range of sectors and sub sectors.
  • Public and private Asset Backed Securities (ABS) and Collateralized Loan Obligations (CLO), offering access to deep pools of assets and granular portfolios across sectors and countries.
  • Credit Risk Transfer strategies offering exposure to banks’ core and performing portfolios, which are a great complement within private debt to idiosyncratic small corporate direct lending.
  • Prime mortgages, providing long duration and attractive spread pick-ups.
  • Lease strategies, which give access to highly diversified portfolios in a protective format.
A year that taught us the value of sustainable investing

In this changing world, the need for responsible investing is becoming increasingly important. While the growth of ESG (Environmental, Social and Governance) and sustainability principles has been significant, these measures are less embedded in private assets. This is largely due to the very nature of private assets regarding information and the different stakeholders that are required to embed these principles in transactions.

However, the sector is responding to the growing demand for sustainable and ethical investments. As one of the largest managers of alternative assets in the world, AXA IM Alts is fully committed to driving the industry’s agenda and to embed ESG in every part of the business. As an example, we started developing our own in-house ESG screening methodology in our leveraged loans division over three years ago. This was essential due to the private nature of information for leveraged loans and the lack of a standardised methodology for ESG scoring. Assets are scored based on information from a specific ESG questionnaire and there is a ban on controversial weapons, soft commodities, palm oil and climate change. We then integrate sustainability risk in each of our investment analysis, in compliance with new regulations.

But while investors historically were interested only in ESG screening methods, today they demand more. Our ESG screening allows us to filter out investments that do not live up to environmental, social and governance standards, while through our private impact strategies we are also able to offer investors access to investments that have a net positive impact on society, an impact that is tangible and measurable. Today, our approach is focused on two main themes: Healthcare and Financial Inclusion on the one hand and Climate and Biodiversity on the other, with a set of clear, measurable KPIs allowing us to measure the actual impact, such as the number of lives saved, or the amount of carbon emission avoided. These are strategies that have been around for some time in public markets but that are still relatively new in private markets. The economic and social impact the pandemic has had globally have further increased investors’ demand for positive impact investments and today we have close to €1bn of AuM in these strategies.

Over the last few years, and in 2020 in particular, we have learned that implementing ESG strategies is no longer a nice-to-have, or a niche investment required by a small group of clients. Our role is to provide long-term and sustainable value to our investors, and factoring in ESG is the best way to be able to deliver it. There is still a lot to do, but as a leader in responsible investing, we are fully committed to make things move in the right direction.

DEBORAH SHIRE
Deputy Head of AXA IM Alts and Global Head of Structured Finance
AXA Investment Managers

AXA IM Alts is a global leader in alternatives investment, with more than €150bn in AuM and an established position in real estate infrastructure private debt and hedge funds. Deborah oversees the Global Structured Finance business, which employs more than 100 professionals in Europe and the US. In 2000, Deborah co-founded the Structured Finance platform, growing it from a €3.5bn business to one of the largest managers of alternative credit assets in Europe today, managing more than €48bn for 100+ clients. In her role, she leads the development and launch of a performing and diversified product range including leveraged loans, ABS, CLOs, ILS, Mortgages and Impact investment. From 2011 to 2014, Deborah served as a Global Head of Business Development within the Real Assets team at AXA IM, in this role she was responsible for Corporate Finance, Investor Relations, Marketing & Communication and Business Development. She was also a member of the Management Board of AXA IM – Real Assets and was instrumental in the creation of the CRE debt platform, now firmly established as a global leader in its field. Deborah has extensive experience working for AXA group and held various positions both in the Finance and Quantitative Management departments before moving to AXA IM Structured Finance in 2000. Deborah holds a Diploma of Financial Analyst from the French Society of Financial Analysts and is a graduate of Ecole Nationale Supérieure de l’Aéronautique et de l’Espace in Engineering.

 

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