Investment Opportunities in Illiquid Fixed Income

Whether we look back 20 years or look forward to the next 20 years, pension funds will remain long- term investors. Their investment strategy needs to ensure they can withstand financial market volatility and at the same time deliver sufficient returns. This requires a focus on the longer-term risks and returns of asset classes and investment strategies. From time to time, new investment opportunities arise because of a changing environment on financial markets. Pension funds will have to analyse these opportunities and determine whether these fit in their longer-term investment strategy.

A prime example of such a changing environment was the financial crisis, as a result of which anomalies developed with a potential to generate higher returns. Due to tighter Eurozone banking regulation and higher capital requirements, banks provide less longer-term financing to companies and to their private customers. Large companies managed to replace bank financing with bond issuance, a move aided by the ECB buying program of corporate bonds. Smaller-sized companies turned to the market for private placements, in which institutional investors provide direct financing. These private placements offer a sizeable pickup in credit spreads compared to public credit bonds. At the same time, investing in credit private placements requires considerable credit research and legal efforts to make sure the credit risks are similar to a portfolio of public credit bonds. Taking these factors into account, outsourcing such investments to a specialised asset manager with a proven track record is the most logical step.

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