Impact private debt: a growing asset class for investors in search of responsible solutions
Private debt funds offer companies an alternative funding solution to bank finance and provide investors with an asset class offering a number of advantages. Among the numerous products currently available on the market, a well thought-out ESG approach proposed by experienced teams can make all the difference to a customer base of investors in search of impact funds. At Groupama AM, private debt managers are particularly committed to addressing social issues within the companies financed.
The increasing success of private debt funds is attracting investors drawn by returns that compare favourably with the market and by potentially regular flows. However, the asset class remains relatively inaccessible to private investors, given the long holding period and limited liquidity of this type of investment vehicle. As a viable alternative to bank credit, private debt increased dramatically in popularity in the wake of the 2008-2009 financial crisis, at a time when the phenomenon of disintermediation, removing the banks as intermediaries in financial transactions, was rapidly gaining ground. One reason for this was that the stricter regulatory framework imposed on the established financial institutions limited the ability of banks to meet the funding needs of companies. In this context, non-bank players arrived on the market to supply the needed finance. In fact, each successive macroeconomic crisis (financial crisis of 2008-2009, sovereign debt crisis of 2011-2012 and Covid-19 pandemic in 2020-2021) gave a further boost to this asset class.
For their part, investors looking for high returns naturally turned to these products, which are potentially more rewarding than the products available on the fixed-income markets, which were negatively affected by the low interest rates proposed. Private debt continues to attract the interest of long-term institutional investors (insurers, mutual insurers, etc.), showing the strength of this ongoing disintermediation movement. In this context, private debt players often step in to fund acquisition operations in which the banks are only permitted to take a limited stake. Similarly, small, medium-sized and mid-market companies wishing to finance their growth will turn to this form of disintermediated finance when they find the doors of the banks closed to them. We should also note that recourse to private debt as a funding solution can reflect the desire by some companies to diversify their sources of finance.
Large choice of instruments
Many private debt products are available to investors. Senior debt, which is paid in priority if the company experiences difficulties, can also take the form of “Euro PP” (Euro Private Investment”) products, a form of funding that appeared in France in 2012. Often, in the context of funding an acquisition, a “unitranche” debt (a simplified investment solution, in which a single product combines senior and junior risk at the same interest rate) is established. Unitranche debt has considerably expanded over the course of the last few years. Other private debt products exist, such as mezzanine debt, an intermediate debt having a risk level between senior debt and equity. Depending on their needs and possibilities, companies use one or other of these private debt instruments or even a combination of several at the same time.
Private debt and impact
As with other asset classes, the impact approach is gaining popularity in private debt. The social aspect is particularly suitable for this approach: identifying a social challenge in a company and contributing to its resolution is part of the role of the socially responsible investor. The aim is to focus on these challenges by establishing connections with these companies and helping them to structure their approach and improve their practices. With the aid of the available indicators, it is possible to measure the progress achieved on the identified social problems.
This ambitious methodology is used in particular by “Article 9” impact funds, based on Article 9 of the European SFDR (Sustainable Finance Disclosure Regulation). By subordinating the aims of a strategy to the attainment of predefined social criteria, some asset managers already propose a bold range of products
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