PRIVATE CREDIT:
A GROWTH MARKET FOR YIELD
Real Estate Debt:
Fostering Relationships and Managing Risks
Infrastructure:
A growing variety of opportunities
Green Infrastructure:
The Road to Net Zero
The Pursuit of Outperformance
The world’s negative-yielding debt pile stood at $16 trillion in July 2021, after touching a high of $18 trillion in December 2020, following massive central bank intervention and exceptionally low interest rates on the heels of the COVID-19 pandemic. Since then bond yields have recovered somewhat in the wake of economic revival and signs of inflation. Signifying an end to the crisis period, the U.S. Federal Reserve has even pledged to unwind the corporate bond holdings acquired to steady markets in the heat of the pandemic. But investors are still living in a low-yield environment resulting from demographics, the vast accumulation of debt, a savings glut, the impact of technology, and globalization.
That means CIOs must look for fresh frontiers for yield, and one place to find them is in private markets. Asset classes such as private credit, real estate debt, infrastructure, and clean energy increasingly offer new opportunities for higher yields, due to powerful forces such as regulations reducing banks’ appetite for lending, the drive for new infrastructure, and the fight against climate change.
U.K.
JAPAN
CHINA
GERMANY
U.S.
2021
2010
Source: Refinitiv data, compiled by Reuters Plus (As of June 2021)
-5
1990
1980
0
5
10
20
15
Bond Yield (1980 -2021)
MORE THAN 40 YEARS OF FALLING YIELDS…
RESULTING FROM POWERFUL MACRO TRENDS.
“
The general level of interest rates has fallen both in the United States and around the world. Estimates of a neutral federal funds rate, which is the rate consistent with the economy operating at full strength and with stable inflation, have fallen substantially, in large part reflecting a fall in the equilibrium real interest rate.”
Jerome Powell, Federal Reserve Chairman, announcing a major shift in monetary policy and the role of lower inflation. August 2020.
While investment-grade corporate bonds have been delivering credit spreads of 1.0-1.5%, it is possible to earn 2.0% or more from senior real estate debt. Similarly, while credit spreads on high-yield bonds might be 4.0% or more, senior mid-market direct lending typically delivers 7.0% or more. What’s more, these loans are often floating rate, protecting against inflation.
Investors seeking additional yield have a growing opportunity in private credit.
YIELD OPPORTUNITY: PRIVATE CREDIT
$1.46 trillion
Source: Preqin
THE PREDICTED SIZE OF THE PRIVATE CREDIT MARKET BY 2025, UP NEARLY 40% FROM $1.046 TRILLION AT THE END OF 2020.
Source: PGIM and Reuters Plus (As of June 2021)
The grave uncertainty caused by the COVID-19 crisis left many companies teetering on the brink of a cash-flow crisis. Small- to mid-size firms in particular were fighting for their survival. PGIM Private Capital worked closely with its portfolio companies on a daily basis, ensuring that if they envisioned cash-flow problems, interest payments would be delayed without penalty.
Cooking up Solutions
Investors
PRIVATE CREDIT STRATEGIES ARE taking market share FROM TRADITIONAL BANK LENDING
Borrowers
Banks
increasingly favor the speed of arranging private credit loans – there are no lengthy discussions with regulators, rating agencies, or relationship banks.
gain yield premiums over corporate bonds, as well as interest that is generally tied to short-term interest rates, providing a hedge against inflation.
have withdrawn from middle-market lending due to capital adequacy regulations, and supply from borrowers is growing.
In the second half of 2020, 30% of all real estate fundraising was accounted for by debt funds.
YIELD OPPORTUNITY: REAL ESTATE
Source: PGIM
“
When we think about the direct lending market, it was originally born out of the GFC, and has grown in the last 10 years. Banks began to go risk off, issuers were looking for sources of leverage lending capital, and the private credit non-bank market was there to provide that capital.”
Matthew Harvey, Partner and Head of Direct Lending,
PGIM Private Capital
EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization
10%
0%
$25mm - $49.9mm
1%
2%
3%
4%
9%
8%
Withstanding the Pandemic: Default Rate by EBITDA in 2020
7%
6%
5%
Source: Proskauer Private Credit Default Index
Source: Proskauer Private Credit Default Index
For example, these could include the right to monitor certain accounting ratios and restrict the amount of additional debt that can be raised.
When PGIM Real Estate provided a $200 million refinancing loan to a leading real estate developer in 2019 for an iconic property in New York’s Lower Manhattan, it was the second time PGIM had lent against one of the developer’s properties, showing the importance of relationships. The 10-year, fixed-rate loan refinanced existing debt and funded the remaining costs of a state-of-the-art renovation, including a 10,000-square-foot landscaped green roof. A well-known technology company is now the anchor tenant.
An average of 3.6% default level for Q4 2020 in the U.S. demonstrates private credit's resilience in the first major downturn to test the market.
Non-bank lenders also negotiate loan covenants, which reduce the risk of default.
Sourcing deals with attractive trade-offs between yield and risk takes extensive global networks and relationships. Deep local knowledge and on-the-ground experience are key to being connected to local deal flow.
The Importance of Risk Management and Expertise
RELATIONSHIPS MATTER
YIELD OPPORTUNITY: INFRASTRUCTURE
Huge ambitions for infrastructure spending to promote economic revival and the energy transition support continuing expansion and growing variety in the availability of yield opportunities. Infrastructure debt offers credit spreads exceeding those in public markets, with mezzanine debt offering equity-like returns.
$15 trillion
This raises the prospect of a return to the days when infrastructure was a popular investment, in the 19th Century. It comes at a time when the International Monetary Fund (IMF) has called on rich nations to boost public spending on infrastructure to support economic recovery, encouraging further investment from the private sector.
Source: IMF Fiscal Monitor: Policies for the Recovery. October 2020
Source: G20 Global Infrastructure Hub
Estimated global infrastructure investment gap to 2040
This includes funding for roads, bridges, the power grid, public transport, and the internet. While the plan doesn’t specifically mention private capital, there are opportunities to cooperate, taking in everything from high-speed broadband to electric vehicle charging infrastructure to renewables. This should boost the supply of infrastructure loans, many of them linked to inflation.
$1 trillion
U.S. investment under Joe Biden’s infrastructure plan.
0
0.5
1.0
1.5
2.0
5.0
Water
Energy
Transport: Port
Transport: Road
Transport: Airport
Transport: Rail
Telecommunications
4.5
4.0
3.5
3.0
2.5
Global forecasts
Annual Investment Need for Each Sector (In Trillions of Dollars)
=
-
Investment Estimates
Trillion
Trillion
Trillion
0%
Source: PGIM data complied by Reuters Plus (As of June 2021)
Infrastructure Mezzanine
Junior Infrastructure Debt
Global HY Corporate Bonds
Senior Infrastructure Debt
Global IG Corporate Bonds
2%
4%
6%
8%
18%
16%
Infrastructure & Mezzanine Debt Deliver Varying Levels of Spread Pick-up Over Traditional Fixed Income
14%
12%
10%
2040
2050
2045
2035
2030
2025
2020
Source: Princeton University study, Net-Zero America
232,000 SQUARE MILES
That’s slightly smaller than two New Mexicos (New Mexico is 121,700 mi²).
Area in the U.S. alone required for onshore wind and solar farms
$4 trillion
Conclusion of Net Zero by 2050: a Roadmap for the Global Energy Sector, based on a joint analysis from the International Energy Agency and the IMF.
clean energy investment is needed annually by 2030 for the global energy sector to achieve net zero emissions by the deadline of 2050.
YIELD OPPORTUNITY: CLEAN ENERGY
Learn More
“
Biden’s policies to the extent enacted will certainly supercharge the efforts that are already underway. However, existing policies and economic forces will, by themselves, result in replacement of two-thirds of the installed capacity base in the U.S. by around 2030 and 100% replacement by 2050. So exciting times, indeed.”
Debra Hemsey, Managing Director, Real Assets – Power,
PGIM Private Capital
In the search for yield, private markets offer not just a yield pick-up but also fresh frontiers for investment. As these markets expand into the real economy, they’re uncovering new opportunities tied to the retreat of banks, the need for new infrastructure, and the fight against climate change. These are powerful macro trends that can deliver a growing supply of income-yielding investments.
Finding Fresh Frontiers in the Search for Yield
1.2%
16%
2050
2045
2035
2030
2025
2020
2015
1980
1985
1990
1995
2000
2005
2010
2040
100- 105
95 - 99
65 - 69
80 - 84
90 - 94
75 -79
85 - 89
70 -74
Source: United Nations
0
100
200
300
500
400
Global Aging Demographics (Millions of People)
China joins the World Trade Organization (WTO)
Index of world trade by value, where 2010 represents 100%.
Source: CPB World Trade Monitor
2021
2011
2001
1991
30
60
90
120
150
Globalization of Trade
2020
Broad Money as defined by World Bank.
Source: OECD
2010
1990
2000
1980
60
90
120
150
Money Supply (World % of GDP)
2019
2010
1990
2000
1980
As measured by Total Factor Productivity at Constant National Prices for United States.
Source: U.S. Federal Reserve
0.6
0.8
1.0
1.2
Productivity Growth Driven by Technology
2019
2010
1990
2000
1980
Measured in trillions of dollars.
Source: World Bank
0
3
2
1
4
Total Global Savings
0%
1%
2%
3%
4%
8%
Private Credit & Real Estate Deliver a Credit Spread Opportunity Over Traditional Fixed Income
7%
6%
5%
Read More
Source: Preqin data complied by Reuters Plus (As of 05/13/2021)
Q4
Q3
Q2
Q1
Read More
2037
2032
2027
2022
2017
2012
2007
Committed investment
$79
Investment gap
$15
Investment needed
$94
The rise of mezzanine debt and direct lending as ways of financing infrastructure offers new risk/return prospects. They offer the combination of equity-like returns with more downside protection.
Infrastructure and clean energy investment themes
Sr Mid-market Direct Lending
Global HY Corporate Bonds
Senior Real Estate Debt
Global IG Corporate Bonds
0
250
500
AUM ($BN)
750
1000
Private Credit Assets Under Management – (AUM)
Jan 2020
Jan 2018
Jan 2016
Jan 2014
Jan 2012
Jan 2010
Jan 2008
Jan 2006
Jan 2004
Jan 2001
Jan 2002
>$50mm
The increase of "greenfield" investment in portfolios offers higher returns at the cost of greater risk.
Technology is becoming more important in infrastructure, both for digital assets, such as data centers, and for creating value in more traditional infrastructure.
As infrastructure is a long-term investment, ESG (Environmental, Social, and Governance) factors are becoming key. There are not only huge demands for clean energy infrastructure, such as wind farms, but also traditional infrastructure often needs to be adapted to a zero-carbon future.
2025
2020
2030
2035
2040
2045
2050
2007
2012
2017
2022
2027
2032
2037
500
600
700
800
900
400
300
200
100
0
Infrastructure Investment Gaps for Each Sector (In Billions of Dollars)
Source: Global Infrastructure Outlook
2.5
3.0
3.5
4.0
2.0
1.5
1.0
0.5
$0
2007
2012
2017
2022
2027
2032
2037
Infrastructure Investment at Current Trend for Each Sector (In Trillions of Dollars)
Investment needed
Committed investment
Investment gap
Cooking up Solutions
One of PGIM Private Capital’s portfolio companies specialized in high-end cookware, with a model based on in-home cooking demonstrations. But the pandemic had meant sales had fallen sharply, and the firm was bracing for the worst. Working together, the decision was made to conduct cooking demonstrations online, realizing that potential clients would not be able to taste or smell the food. That pivot was hugely successful, and sales started coming in well above plan. Going forward, the strategy is another leg of the stool for the company to grow.
In disruptive periods such as the one brought on by COVID-19, there is opportunity to take advantage of a “good company, bad balance sheet” scenario – investing in companies that have excess leverage and may be behind in their business plans but that are otherwise stable and poised to recover. For investors, the loans have terms and other abilities to limit and manage credit risk, so the volatility of the loan’s value is much tighter and much less than you find in the capital markets. The risk-adjusted yield available to investors can offer superior value over a long period of time regardless of the relative spread compression or expansion at any given period.
Biden’s Bill
$55 billion for water and wastewater infrastructure, including funding to replace all of the nation’s service lines using lead pipe.
$39 billion for public transit to modernize bus and subway fleets.
$25 billion for airport improvements to maintenance and congestion.
$21 billion to clean up superfund and brownfield sites, reclaim abandoned mine land and cap obsolete gas wells.
$17 billion for ports.
$7.5 billion for electric vehicle charging stations.
$5 billion for electric school buses and hybrids.
$110 billion for roads and bridges.
$73 billion to modernize the U.S. electric grid and expand use of renewable energy.
$66 billion for passenger and freight rail.
$65 billion to expand broadband access.
Green Infrastructure
Infrastructure
Real Estate DebT
PRIVATE CREDIT
INTRO
Green Infrastructure
Infrastructure
Real Estate DebT
PRIVATE CREDIT
INTRO
Green Infrastructure
Infrastructure
Real Estate DebT
PRIVATE CREDIT
INTRO
Green Infrastructure
Infrastructure
Real Estate DebT
PRIVATE CREDIT
INTRO
Green Infrastructure
Infrastructure
Real Estate DebT
PRIVATE CREDIT
INTRO
SOME HIGHLIGHTS OF Joe Biden’s infrastructure plan
2020
2000
Source: Princeton University
Source: Princeton University
Source: IEA
Roll over country for individual bond yield values
Roll over age ranges for detailed values
Roll over sector for individual data
Select year for annual projection
OUTFRONT
May 2021
The Pursuit of Outperformance
Learn More
In the search for yield, private markets offer not just a yield pick-up but also fresh frontiers for investment. As these markets expand into the real economy, they’re uncovering new opportunities tied to the retreat of banks, the need for new infrastructure, and the fight against climate change. These are powerful macro trends that can deliver a growing supply of income-yielding investments.
FINDING FRESH FRONTIERS IN THE SEARCH FOR YIELD
Debra Hemsey, Managing Director, Real Assets – Power,
PGIM Private Capital
Biden’s policies to the extent enacted will certainly supercharge the efforts that are already underway. However, existing policies and economic forces will, by themselves, result in replacement of two-thirds of the installed capacity base in the U.S. by around 2030 and 100% replacement by 2050. So exciting times, indeed.”
“
AREA IN THE U.S. ALONE REQUIRED FOR ONSHORE WIND AND SOLAR FARMS
That’s slightly smaller than two New Mexicos (New Mexico is 121,700 mi²).
232,000
SQUARE MILES
Source: Princeton University study, Net-Zero America
INFRASTRUCTURE AND CLEAN ENERGY INVESTMENT THEMES
The rise of mezzanine debt and direct lending as ways of financing infrastructure offers new risk/return prospects. They offer the combination of equity-like returns with more downside protection.
The increase of "greenfield" investment in portfolios offers higher returns at the cost of greater risk.
Technology is becoming more important in infrastructure, both for digital assets, such as data centers, and for creating value in more traditional infrastructure.
As infrastructure is a long-term investment, ESG (Environmental, Social, and Governance) factors are becoming key. There are not only huge demands for clean energy infrastructure, such as wind farms, but also traditional infrastructure often needs to be adapted to a zero-carbon future.
YIELD OPPORTUNITY: CLEAN ENERGY
CLEAN ENERGY INVESTMENT IS NEEDED ANNUALLY BY 2030 FOR THE GLOBAL ENERGY SECTOR TO ACHIEVE NET ZERO EMISSIONS BY THE DEADLINE OF 2050.
Conclusion of Net Zero by 2050: a Roadmap for the Global Energy Sector, based on a joint analysis from the International Energy Agency and the IMF.
Source :IEA
$4 TRILLION
Green Infrastructure:
The Road to Net Zero
U.S. INVESTMENT UNDER JOE BIDEN’S INFRASTRUCTURE PLAN.
$1 TRILLION
This includes funding for roads, bridges, the power grid, public transport, and the internet. While the plan doesn’t specifically mention private capital, there are opportunities to cooperate, taking in everything from high-speed broadband to electric vehicle charging infrastructure to renewables. This should boost the supply of infrastructure loans, many of them linked to inflation.
Read More
-
=
TRILLION
TRILLION
TRILLION
$94
Investment needed
$15
$79
Annual Investment Need for Each Sector
(In Trillions of Dollars)
2.5
3.0
3.5
4.0
4.5
5.0
2.0
1.5
1.0
0.5
0
2007
2012
2017
2022
2027
2032
Source: Global Infrastructure Outlook
2037
Telecommunication
Transport: Rail
Transport: Airport
Transport: Road
Transport: Port
Energy
Water
Investment Estimates
Global forecasts
ESTIMATED GLOBAL INFRASTRUCTURE INVESTMENT GAP TO 2040
Source: G20 Global Infrastructure Hub
Source: IMF Fiscal Monitor: Policies for the Recovery. October 2020
This raises the prospect of a return to the days when infrastructure was a popular investment, in the 19th Century. It comes at a time when the International Monetary Fund (IMF) has called on rich nations to boost public spending on infrastructure to support economic recovery, encouraging further investment from the private sector.
$15 TRILLION
Infrastructure & Mezzanine Debt Deliver Varying Levels of Spread Pick-up Over Traditional Fixed Income
10%
12%
14%
16%
18%
8%
6%
4%
2%
Global IG Corporate Bonds
Senior Infrastructure Debt
0%
Global HY Corporate Bonds
Junior Infrastructure Debt
Infrastructure Mezzanine
Source: PGIM data complied by Reuters Plus
Huge ambitions for infrastructure spending to promote economic revival and the energy transition support continuing expansion and growing variety in the availability of yield opportunities. Infrastructure debt offers credit spreads exceeding those in public markets, with mezzanine debt offering equity-like returns.
YIELD OPPORTUNITY: INFRASTRUCTURE
Infrastructure:
A growing variety of opportunities
Real Estate Debt:
Fostering Relationships and Managing Risks
Source: PGIM
RELATIONSHIPS MATTER
SOURCING DEALS WITH ATTRACTIVE TRADE-OFFS BETWEEN YIELD AND RISK TAKES EXTENSIVE GLOBAL NETWORKS AND RELATIONSHIPS. DEEP LOCAL KNOWLEDGE AND ON-THE-GROUND EXPERIENCE ARE KEY TO BEING CONNECTED TO LOCAL DEAL FLOW.
When PGIM Real Estate provided a $200 million refinancing loan to a leading real estate developer in 2019 for an iconic property in New York’s Lower Manhattan, it was the second time PGIM had lent against one of the developer’s properties, showing the importance of relationships. The 10-year, fixed-rate loan refinanced existing debt and funded the remaining costs of a state-of-the-art renovation, including a 10,000-square-foot landscaped green roof. A well-known technology company is now the anchor tenant.
YIELD OPPORTUNITY: REAL ESTATE
IN THE SECOND HALF OF 2020, 30% OF ALL REAL ESTATE FUNDRAISING WAS ACCOUNTED FOR BY DEBT FUNDS.
THE IMPORTANCE OF RISK MANAGEMENT AND EXPERTISE
NON-BANK LENDERS ALSO NEGOTIATE LOAN COVENANTS, WHICH REDUCE THE RISK OF DEFAULT.
AN AVERAGE OF 3.6% DEFAULT LEVEL FOR Q4 2020 IN THE U.S. DEMONSTRATES PRIVATE CREDIT'S RESILIENCE IN THE FIRST MAJOR DOWNTURN TO TEST THE MARKET.
For example, these could include the right to monitor certain accounting ratios and restrict the amount of additional debt that can be raised.
Source: Proskauer Private Credit Default Index
Matthew Harvey, Partner and Head of Direct Lending,
PGIM Private Capital
When we think about the direct lending market, it was originally born out of the GFC, and has grown in the last 10 years. Banks began to go risk off, issuers were looking for sources of leverage lending capital, and the private credit non-bank market was there to provide that capital.”
“
5%
6%
7%
8%
9%
4%
3%
2%
1%
$25mm - $49.9mm
>$50mm
0%
10%
Q1
Q2
Q3
Q4
Withstanding the Pandemic: Default Rate by EBITDA in 2020
EBITDA = Earnings Before Interest, Tax, Depreciation and Amortization
Source: Proskauer Private Credit Default Index
COOKING UP SOLUTIONS
The grave uncertainty caused by the COVID-19 crisis left many companies teetering on the brink of a cash-flow crisis. Small- to mid-size firms in particular were fighting for their survival. PGIM Private Capital worked closely with its portfolio companies on a daily basis, ensuring that if they envisioned cash-flow problems, interest payments would be delayed without penalty.
Read More
PRIVATE CREDIT STRATEGIES ARE TAKING MARKET SHARE FROM TRADITIONAL BANK LENDING
have withdrawn from middle-market lending due to capital adequacy regulations, and supply from borrowers is growing.
increasingly favor the speed of arranging private credit loans – there are no lengthy discussions with regulators, rating agencies, or relationship banks.
gain yield premiums over corporate bonds, as well as interest that is generally tied to short-term interest rates, providing a hedge against inflation.
Banks
Borrowers
Investors
Private Credit Assets Under Management – (AUM)
1000
750
500
250
0
Jan 2001
Jan 2004
Jan 2008
Jan 2012
Jan 2016
Jan 2020
May 2021
Source: Preqin (as of 05/13/2021)
AUM ($BN)
THE PREDICTED SIZE OF THE PRIVATE CREDIT MARKET BY 2025, UP NEARLY 40% FROM $1.046 TRILLION AT THE END OF 2020.
Source: Preqin
$1.46 trillion
5%
6%
7%
8%
4%
3%
2%
1%
0%
Private Credit & Real Estate Deliver a Credit Spread Opportunity Over Traditional Fixed Income
Global IG Corporate Bonds
Senior Real Estate Debt
Global HY Corporate Bonds
Source: PGIM and Reuters Plus
Sr Mid-market Direct-lending
YIELD OPPORTUNITY: PRIVATE CREDIT
INVESTORS SEEKING ADDITIONAL YIELD HAVE A GROWING OPPORTUNITY IN PRIVATE CREDIT.
While investment-grade corporate bonds have been delivering credit spreads of 1.0-1.5%, it is possible to earn 2.0% or more from senior real estate debt. Similarly, while credit spreads on high-yield bonds might be 4.0% or more, senior mid-market direct lending typically delivers 7.0% or more. What’s more, these loans are often floating rate, protecting against inflation.
PRIVATE CREDIT:
A GROWTH MARKET FOR YIELD
Jerome Powell, Federal Reserve Chairman, announcing a major shift in monetary policy and the role of lower inflation. August 2020.
The general level of interest rates has fallen both in the United States and around the world. Estimates of a neutral federal funds rate, which is the rate consistent with the economy operating at full strength and with stable inflation, have fallen substantially, in large part reflecting a fall in the equilibrium real interest rate.”
“
150
120
90
60
30
1991
2001
2021
2011
Globalization of Trade
China joins the World Trade Organization (WTO)
Index of world trade by value, where 2010 represents 100%.
Source: CPB World Trade Monitor
Broad Money as defined by World Bank
Source: World Bank
150
120
90
60
1980
2000
1990
2010
2020
Money Supply (World % of GDP)
As measured by Total Factor Productivity at Constant National Prices for United States
Source: US Federal Reserve
Productivity Growth Driven by Technology
1.2
1.0
0.8
0.6
1980
2000
1990
2010
2019
Measured in trillions of dollars.
4
1
2
3
0
Total Global Savings
Source: World Bank
1980
2000
1990
2010
2019
RESULTING FROM POWERFUL MACRO TRENDS.
400
500
300
200
100
0
Global Aging Demographics (Millions of People)
2040
2010
2000
1990
1980
2020
2030
2050
70 -74
85 - 89
75 -79
90 - 94
80 - 84
65 - 69
95 - 99
100 - 105
Source: United Nations
10 Year Bond Yield (1980 -2021)
U.S.
GERMANY
CHINA
JAPAN
U.K.
15
20
10
5
0
1980
1990
2000
-5
2010
2020
1.2%
16%
Source: Refinitiv data, compiled by Reuters Plus
MORE THAN 40 YEARS OF FALLING YIELDS…
+
PRESENT
Powerful trends are driving higher-yielding opportunities in private markets
Fresh Frontiers in the Hunt for Yield
The world’s negative-yielding debt pile stood at $16 trillion in July 2021, after touching a high of $18 trillion in December 2020, following massive central bank intervention and exceptionally low interest rates on the heels of the COVID-19 pandemic. Since then bond yields have recovered somewhat in the wake of economic revival and signs of inflation. Signifying an end to the crisis period, the U.S. Federal Reserve has even pledged to unwind the corporate bond holdings acquired to steady markets in the heat of the pandemic. But investors are still living in a low-yield environment resulting from demographics, the vast accumulation of debt, a savings glut, the impact of technology, and globalization.
That means CIOs must look for fresh frontiers for yield, and one place to find them is in private markets. Asset classes such as private credit, real estate debt, infrastructure, and clean energy increasingly offer new opportunities for higher yields, due to powerful forces such as regulations reducing banks’ appetite for lending, the drive for new infrastructure, and the fight against climate change.
OUTFRONT
The total of the world’s negative-yielding bonds in July 2021
Source: Bloomberg Barclays Global Negative Yielding Debt Index
committed investment
Investment gap
500
600
700
800
900
400
300
200
100
0
2007
2012
2017
2022
2027
2032
2037
2.5
3.0
3.5
4.0
2.0
1.5
1.0
0.5
0
2007
2012
2017
2022
2027
2032
2037
Annual Investment Need for Each Sector
(In Trillions of Dollars)
Annual Investment Need for Each Sector
(In Trillions of Dollars)
SOME HIGHLIGHTS OF JOE BIDEN’S INFRASTRUCTURE PLAN
$55 billion for water and wastewater infrastructure, including funding to replace all of the nation’s service lines using lead pipe.
$39 billion for public transit to modernize bus and subway fleets.
$25 billion for airport improvements to maintenance and congestion.
$21 billion to clean up superfund and brownfield sites, reclaim abandoned mine land and cap obsolete gas wells.
$17 billion for ports.
$7.5 billion for electric vehicle charging stations.
$5 billion for electric school buses and hybrids.
$110 billion for roads and bridges.
$73 billion to modernize the U.S. electric grid and expand use of renewable energy.
$66 billion for passenger and freight rail.
$65 billion to expand broadband access.
One of PGIM Private Capital’s portfolio companies specialized in high-end cookware, with a model based on in-home cooking demonstrations. But the pandemic had meant sales had fallen sharply, and the firm was bracing for the worst. Working together, the decision was made to conduct cooking demonstrations online, realizing that potential clients would not be able to taste or smell the food. That pivot was hugely successful, and sales started coming in well above plan. Going forward, the strategy is another leg of the stool for the company to grow.
In disruptive periods such as the one brought on by COVID-19, there is opportunity to take advantage of a “good company, bad balance sheet” scenario – investing in companies that have excess leverage and may be behind in their business plans but that are otherwise stable and poised to recover. For investors, the loans have terms and other abilities to limit and manage credit risk, so the volatility of the loan’s value is much tighter and much less than you find in the capital markets. The risk-adjusted yield available to investors can offer superior value over a long period of time regardless of the relative spread compression or expansion at any given period.
Source :IEA
