Tuesday, July 15, 2025

Infrastructure: Building Blocks for a Sustainable Future

Infrastructure across many parts of the world...

The Changing Role of Private Credit in a New Interest Rate Environment

During the era of near-zero or negative...

Interrupted Momentum in Private Markets as Evergreen Structures Reshape Dynamics

The Manager Selection team at SEB Asset...
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Infrastructure: Building Blocks for a Sustainable Future

Eugeniu Guzun
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Infrastructure: Building Blocks for a Sustainable Future

Infrastructure across many parts of the world is either decades old or, in some regions, barely existent. Against this backdrop, the need for infrastructure investment is immense. Powerful structural shifts – such as the transition to sustainable energy, widespread decarbonization, and the rapid expansion of AI-driven technologies – are only accelerating demand. With the capital-intensive nature of infrastructure projects, public funding alone is insufficient. This gap creates an important role for private capital, with global institutional investors like Allianz Global Investors stepping in to meet the growing need.

“Infrastructure investment is not only a need in emerging markets,” says Maria Aguilar-Wittmann, Co-Head of Infrastructure Equity Funds and Co-Investments and Secondaries at Allianz Global Investors. “Of course, the need is more acute in some of those regions, but the necessity for modernizing infrastructure spans virtually every jurisdiction.” Aguilar-Wittmann, who has over 15 years of experience in infrastructure investing, notes that demand consistently outpaces actual infrastructure spending – “a trend that hasn’t changed over the last five, ten, or even twenty years.”

“Of course, the need is more acute in some of those regions, but the necessity for modernizing infrastructure spans virtually every jurisdiction.”

This is driven not only by the aging state of current infrastructure but also by deep-rooted structural trends. “Decarbonization efforts cut across all sectors – energy, transport, mobility, buildings, agriculture, forestry,” she notes. “Studies show that achieving net-zero targets would require approximately $9 trillion in annual infrastructure investment in energy and land-use systems. And we are nowhere near that figure today.[1]”

As governments face fiscal constraints and competing priorities, the role of private capital in infrastructure has become increasingly essential. Beyond merely plugging funding gaps, private investors are helping to shape what gets built and how. “Private capital is not just there to fill the space left by governments or public sources,” says Aguilar-Wittmann. “It’s also helping steer the direction of infrastructure development. Institutional investors and fund managers are focused on ensuring that these projects address infrastructure needs while delivering attractive, risk-adjusted returns.”

Key Investment Themes: Energy, Digitalization, and Geopolitics

Infrastructure plays a foundational role in transitioning to a more sustainable and resilient global economy. Recent geopolitical disruptions – particularly the war in Ukraine – have underscored vulnerabilities in existing systems, catalyzing the shift toward long-term infrastructure solutions. The energy crisis following the invasion revealed Europe’s heavy reliance on fossil energy imports, which could be reduced through investments in renewable energy produced within Europe. Decarbonization is no longer just about clean power; it now includes broad sectors such as mobility and industrial production.

Another structural trend reshaping infrastructure needs is digitalization, an area that has seen explosive growth with the rise of artificial intelligence. “Even before the AI boom, demand for digital services drove major investments in macro towers, fiber networks, and data centers,” says Aguilar-Wittmann. “The public cloud and the increasing speeds demanded by mobile users were already pushing capacity to its limits.”

“The AI wave has created incremental demand, particularly for data centers. And data centers are extremely energy-intensive.”

AI has added a new dimension to the infrastructure narrative. “The AI wave has created incremental demand, particularly for data centers,” Aguilar-Wittmann continues. “And data centers are extremely energy-intensive. Generative AI, in particular, is driving up workloads and therefore dramatically increasing energy needs across digital infrastructure that preferably should be met with green energy.”

Why Infrastructure Matters for Institutional Portfolios

The surge in infrastructure investment needs is underpinned by aging assets, growing populations, urbanization, digital transformation, and the energy transition. For institutional investors, infrastructure offers more than just impact – it also delivers long-term, often inflation-linked, and relatively stable cash flows. These features align well with the liabilities of pensions and insurance companies.

“There are different risk-return profiles in infrastructure: core, core-plus, value-add,” explains Aguilar-Wittmann. “But across the board, infrastructure is known for capital preservation, even in downside scenarios,” she notes. “Long-term contracts support cash flows, and contractual protections provide visibility over the investment period.”

“But across the board, infrastructure is known for capital preservation, even in downside scenarios. Long-term contracts support cash flows, and contractual protections provide visibility over the investment period.”

These protections can vary depending on the type of infrastructure investment, from regulatory guarantees to strong market positions. Aguilar-Wittmann, whose focus is on infrastructure equity, emphasizes that even though equity sits at the bottom of the capital structure, it carries relatively lower risk compared to other private market investments. “Returns typically range from single digits in super-core assets to high teens for value-add investments. The downside protection makes this asset class uniquely attractive.”

Infrastructure equity can also serve as a hedge against inflation. “Many infrastructure business models have built-in inflation protection, whether through contractual indexing or market positioning that allows for pricing power,” says Aguilar-Wittmann. “That’s a valuable feature in today’s macro environment.” Over time, infrastructure has proven to deliver recurring cash yields, particularly appealing to institutions seeking income. 

Long-Term Nature: Challenge and Opportunity

The long-term horizon of infrastructure can be a barrier for some investors. “Liquidity can be a hurdle for those just becoming familiar with the asset class,” Aguilar-Wittmann acknowledges. Regulatory complexity is another challenge, particularly for global investors. “Some jurisdictions treat infrastructure the same as private equity from a regulatory standpoint, even though the risks are quite different. That misalignment can affect allocations.”

As in many private market strategies, sourcing high-quality opportunities remains one of the key challenges in infrastructure investing. However, for established players like Allianz, scale and reputation help to ease that burden. “Allianz is the number one institutional infrastructure investor in Europe[2],” says Aguilar-Wittmann. “Between Allianz’s insurance business and Allianz Global Investors’ private markets arm, we have strong brand recognition, and fund managers in the space often come to us.”

“Between Allianz’s insurance business and Allianz Global Investors’ private markets arm, we have strong brand recognition, and fund managers in the space often come to us.”

In addition to inbound opportunities, the firm maintains an active sourcing effort. “We have a large, dedicated infrastructure equity team – about 70 professionals globally – covering energy, digital infrastructure, and all other infrastructure sectors,” notes Aguilar-Wittmann. “This breadth allows for deep sector expertise and internal knowledge-sharing.”

A Rapidly Growing Asset Class

Infrastructure has evolved from a niche asset class to a $1.5 trillion industry over the past two decades[3] – a transformation driven by the global need for modern, resilient systems. That growth is expected to accelerate further as long-term structural trends like decarbonization and digitalization continue to shape investment needs. “At the same time, emerging dynamics such as market consolidation, deglobalization, and the push for national energy independence are opening new avenues for deployment,” concludes Aguilar-Wittmann. As countries invest to strengthen both their physical and strategic infrastructure, the asset class is becoming an increasingly vital component of institutional portfolios.

[1] Pathway toward 1.5°C using the Net Zero 2050 scenario from the Network for Greening the Financial System (NGFS). https://www.mckinsey.com/capabilities/sustainability/our-insights/the-net-zero-transition-what-it-would-cost-what-it-could-bring

[2] IPE Real Assets top 100 ranking (2024).

[3] Preqin data as of June 2024.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable at the time of publication. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). The Summary of Investor Rights is available in English, French, German, Italian and Spanish at https://regulatory.allianzgi.com/en/investors-rights The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors GmbH.

This article features in the “2025 Private Markets” publication.

The Changing Role of Private Credit in a New Interest Rate Environment

Eugeniu Guzun
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The Changing Role of Private Credit in a New Interest Rate Environment

During the era of near-zero or negative interest rates, traditional fixed income delivered minimal returns, prompting investors to turn to private credit for higher yields driven by illiquidity and complexity premia. However, the shift to a higher-for-longer interest rate environment has altered the dynamics and appeal of the asset class. The role of private credit in an investor’s portfolio has “changed a bit” over the years, according to Tero Pesonen, Director for Private Equity and Private Credit at Local Tapiola Asset Management.

“When rates were zero or negative, moving to private credit was a conscious choice to get a yield pickup, and the mandate was much narrower,” says Pesonen. “Today, mandates have broadened to capture illiquidity premia wherever they’re best attainable.” He emphasizes that private credit now serves primarily as a return enhancer and portfolio diversifier. “You get different return components, diversification benefits, and non-mark-to-market exposure. But that last part is not a target or design – it’s more of an added advantage.”

“You get different return components, diversification benefits, and non-mark-to-market exposure. But that last part is not a target or design – it’s more of an added advantage.”

Local Tapiola Group is one of Finland’s largest insurance and financial services companies, formed through the merger of Lähivakuutus and Tapiola in 2012. Since 2015, the group’s private equity and private credit allocations have been made through fund-of-fund structures launched approximately every three years for both asset classes. Since 2020, these vehicles have also raised external capital. “It’s a good mix of internal capital and a business-building exercise on the side,” says Pesonen, who oversees manager selection and manages about €2.4 billion invested in third-party private credit funds.

Defining Private Credit: Beyond Direct Lending

While private credit has cemented its position as a standalone asset class and a cornerstone in most institutional portfolios, Pesonen emphasizes the importance of first agreeing on what the term actually means. “More often than not, private credit is almost synonymous with direct lending,” he notes. However, private credit reflects a broader universe. “Direct lending is a big part, but just a part.” Although private credit existed well before the global financial crisis – through mezzanine financing within private equity and distressed debt within hedge funds – “the wave of post-crisis bank regulation truly established direct lending as a standalone asset class.” Today, the private credit market stands at around $1.5 trillion, roughly equivalent in size to the syndicated loan market.

Collaboration Between Banks and Private Credit Managers

International banking regulation increased capital requirements and made many forms of lending less profitable for banks. Direct lending – the largest sub-strategy within private credit – has emerged to fill this gap, with direct lending managers increasingly resembling banks in function. However, banks remain present and increasingly collaborate with private credit players.

“Origination partnerships between private credit managers and banks have been a very natural progression,” argues Pesonen, adding that he’s “quite surprised this trend has only emerged recently – perhaps banks were a bit slow to realize the opportunity.” He believes that the market is well divided, with banks having established partnerships with private credit managers. “There are already large players with very strong market positions.”

“Origination partnerships between private credit managers and banks have been a very natural progression.” 

However, Pesonen does not see these origination partnerships as the main driver behind the ‘bigger-getting-bigger’ or ‘winner-takes-all’ trend. Instead, he emphasizes that banks need these partnerships because private credit players provide the necessary capital when clients seek to raise funds, making collaboration essential on both sides. “Buyout firms, in particular, prefer to work with lenders who have substantial capital,” he points out. This makes sense because the buyout strategy is primarily buy-and-build – acquiring a platform and then expanding through further acquisitions. To support this growth, “they need lenders capable of financing those acquisitions.”

On the other side, limited partners (LPs), have recently shown a clear preference for investing in the biggest players. While these firms may not always be the absolute best, their size gives them an undeniable advantage. “This creates a reinforcing cycle: larger firms find it easier to raise capital, and buyout firms are increasingly inclined to work with them, further consolidating their market dominance.”

Direct Lending vs. Syndicated Loans: Increasing Convergence

Private credit has not only caught up with the broadly syndicated loan (BSL) market in terms of scale – now standing at roughly the same size – but direct lending is increasingly beginning to mirror the syndicated loan market in both structure and competitive dynamics. “Direct lending has become a standardized commodity,” says Pesonen. “In many ways, it resembles the syndicated bank loan market from 20 years ago when the banks used to syndicate loans between themselves.” Today, direct lenders are syndicating loans among themselves, particularly in the upper mid-market, which is driving increased price competition and putting downward pressure on spreads.

“Direct lending has become a standardized commodity. In many ways, it resembles the syndicated bank loan market from 20 years ago when the banks used to syndicate loans between themselves.”

At the larger end of the market, loan documentation is increasingly similar to the covenant-light terms common in syndicated loans. “The weaker documentation is also coming into the direct lending market,” notes Pesonen. Borrowers often have a choice between syndicated bank loans and direct lending, creating real competition between the two. “The syndicated loan market typically lacks certain features like acquisition lines suited for buy-and-build strategies, which direct lenders offer.” Nevertheless, “these two options compete closely.” One manager described their upper-market offering as essentially “BSL plus,” highlighting how the boundaries between these markets are increasingly blurring.

“The syndicated loan market typically lacks certain features like acquisition lines suited for buy-and-build strategies, which direct lenders offer. These two options compete closely.”

In 2022 and 2023, the broadly syndicated loan (BSL) market faced a significant disruption due to issues in the collateralized loan obligation (CLO) market, which underpins much of the loan syndication process. “Seventy percent of bank loans end up in CLOs,” Pesonen explains, highlighting how deeply interconnected these markets are. While the spreads on the underlying loans remained relatively stable, the spreads on the AAA tranches of CLOs – the safest liability slices – widened sharply. This spike made funding via CLO liabilities too costly for managers to issue new debt. “The math didn’t work, so the liabilities were too pricey,” Pesonen says. This bottleneck allowed direct lending to temporarily replace the syndicated loan market as the primary financing source. In 2024, “the triple-A spread tightened back to around 110 basis points,” reviving CLO issuance and normalizing syndication once again.

Challenges and Systemic Risk in Private Credit

At the same time, signs of strain are emerging in legacy private credit portfolios. “While transparency remains limited, anecdotally you hear in many places that extended holding periods are becoming common,” Pesonen notes. “Maturities are being pushed back, and amendments are used to delay refinancing because securing new financing has become more challenging.” Although new deals may still offer attractive pricing, older vintages – originated under very different market conditions – are starting to show pressure as exit timelines lengthen and refinancing options remain constrained.

The question of whether private credit poses a systemic risk has been much debated. To that, Pesonen is clear: “My answer is a definite no. This really comes down to the fundamental differences between private credit and traditional bank lending.” He explains that banks historically were highly leveraged – sometimes up to 30 times – and faced significant asset-liability mismatches, borrowing short-term funds while lending long-term. “This imbalance created a fragile system susceptible to runs and liquidity crises.”

“Most private credit vehicles are closed-end funds with long-term capital, and they tend to be hardly leveraged. From a societal and systemic point of view, this makes private credit a far more stable and less risky component of the financial ecosystem.”

“In contrast,” Pesonen continues, “private credit funds operate in a very different environment. Most private credit vehicles are closed-end funds with long-term capital, and they tend to be hardly leveraged.” This structure aligns asset and liability durations much more closely, reducing the risk of sudden liquidity shortfalls. “From a societal and systemic point of view, this makes private credit a far more stable and less risky component of the financial ecosystem.”

In conclusion, Pesonen highlights growing regulatory scrutiny around private credit, noting that while increased regulation could pose new challenges, the broader trend in bank oversight over the past 15 years has consistently moved toward stricter standards. He also emphasizes the role of political uncertainty: “Political shifts could lead to looser bank regulation.” Given that banks and private credit funds effectively compete for the same business, “regulatory changes in one can influence the other.”

This article features in the “2025 Private Markets” publication.

Interrupted Momentum in Private Markets as Evergreen Structures Reshape Dynamics

Eugeniu Guzun
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Interrupted Momentum in Private Markets as Evergreen Structures Reshape Dynamics

The Manager Selection team at SEB Asset Management published their annual Private Markets Report in early April, which explores the shifting momentum across private equity, credit, infrastructure, and real estate, as well as some more niche private assets. 

“Private markets have already navigated three distinct phases in 2025. Going into the year, sentiment across private markets was broadly positive – returns in 2024 were higher, and the latest data showed positive cash flows, something we hadn’t seen in several years,” says Alexandra Voss, Senior Manager Selector at SEB. “That was a significant shift and created expectations for increased deal-making and capital returns, which would in turn support better fundraising.” Then, she notes, tariff-related uncertainty in April reintroduced volatility especially in the macroeconomic outlook and increased the dispersion of possible market trajectories. “And since our report was published in April, we have now entered a new phase where uncertainty remains, but the worst of the fear has receded, revealing a few potential bright spots of opportunity.”

Tariff Uncertainty Clouds an Encouraging Start to 2025

In the private credit space, Voss agrees with the consensus that tariff uncertainty will slow private equity-sponsored deal activity, leading to more supply than demand for direct lending loans. However, in a more uncertain environment, she notes that private equity sponsors are likely to place greater emphasis on execution certainty. “While overall deal volume may decline, direct lending’s share of completed deals in upper middle market may actually increase,” she adds. This shift, according to Voss, could preserve spreads and maintain quality in the direct lending space. “While the hard data still shows compression, the most recent forward looking survey data shows expectations for slightly higher spreads and more protections in Q2 versus Q1, as well as an increase in deal volume.” 

“While overall deal volume may decline, direct lending’s share of completed deals in upper middle market may actually increase.” 

Private equity deal-making has slowed notably in recent years. Higher interest rates, economic uncertainty, and tighter credit conditions have made transactions harder to finance and complete. At the same time, valuation gaps between buyers and sellers remain, leading to longer negotiations and more failed deals. Although the outlook heading into 2025 was generally positive, deal activity typically slows in periods of uncertainty – a dynamic amplified by the current U.S. administration’s tariff agenda.

Roughly 35 percent of private equity-backed companies in the U.S. have now been held for more than five years, increasing pressure to return capital to investors. But Alexandra Voss thinks the problem is bigger. “The 3-5 year holding period reflected a strategy similar to buying a fixer-upper house. The sponsor would identify a company that could benefit from improvements, both cosmetic and functional. Once the fixes are complete, the sponsor looks to sell it at a higher price.” It’s largely an operational play, she says, with value creation often coming from improving efficiency, cutting costs, honing market fit, and professionalizing management – factors that, along with access to cheap leverage, have historically driven strong returns. 

“But given the amount of capital raised for large cap private equity, it seems reasonable that the number of large fixer-uppers available has declined. You see this in the increase in secondary buyouts as exits, where one PE firm buys a company from another PE firm. This has become the most common form of exit for PE holdings in Europe and North America.” Instead, Voss thinks that one area that may stand out in 2025 is the middle market. “Smaller and middle market companies are typically less exposed to global supply chains, and valuations remain well below large-cap levels, yet less than 15 percent of buyout capital in 2024 went to funds under USD 1 billion, the lowest share on record.” This dynamic has left the middle market less crowded, creating a potentially favorable backdrop.

Evergreen Structures Gain Traction

Traditional private equity managers often feel pressure to return capital to investors so LPs can invest in their next fund vintage. However, the rise of evergreen and semi-liquid fund structures may be shifting this traditional dynamic, impacting how managers raise capital, make investments, value their portfolios, and distribute returns. Voss points to “push, pull, and [ELTIF] policy” as the driving forces behind the emergence of semi-liquid structures. 

“There have been lower levels of deal making, and that has real consequences for the traditional model,” says Voss. “This has pushed managers to look to new ways to attract capital.” On the pull side, these structures offer under-allocated investors access that better fits operational needs. “While these structures come with important considerations, they solve a problem for many investors,” Voss says.

“While these structures come with important considerations, they solve a problem for many investors.”

When first encountering semi-liquid structures in illiquid markets like private equity or private credit, Voss was skeptical. “I have always invested on behalf of institutions putting hundreds of millions of euros to work, and it’s a very intellectually rigorous way of investing,” she recalls. However, she soon recognized a practical reality: “If you’re investing in private debt, for example, and want to maintain a strategic allocation, you need to create an allocation program and be making new investments continuously to sustain that level.” Each vintage entails managing an average of 80 independent cash events – capital calls and distributions – requiring substantial infrastructure and effort. “For many managers and investors, that’s a significant amount of work and results in under-allocation for non-investment reasons.”

Private Debt Emerges as Natural Fit for Semi-Liquid Fund Formats

Thus, with the growth of structures like ELTIFs (European Long-Term Investment Funds), Voss sees a clear push and pull dynamic between the careful, traditional way institutions invest and the need for more practical, flexible solutions to manage ongoing investments. Yet, she stresses that evergreen structures won’t suit all private market segments equally. “Based on data, growth of evergreen funds won’t be evenly spread across private markets,” she explains. “I don’t expect many evergreen venture capital funds because of their wide return variability.” Instead, Voss sees the strongest potential for evergreen growth in private debt, a natural fit given its steady cash flow, more predictable liquidity, and narrower valuation ranges.

“Based on data, growth of evergreen funds won’t be evenly spread across private markets. I don’t expect many evergreen venture capital funds because of their wide return variability.”

Evergreen structures can be applied to other asset classes across private markets, but doing so demands a thorough understanding of each asset’s valuation range and outcome distribution. “This is why I don’t expect venture capital to gain much traction in this space –the range of outcomes there is extremely wide,” Voss explains. 

From an investor’s perspective, achieving a strategic allocation to private debt or private equity typically involves managing multiple vintages individually or opting for an evergreen fund that provides built-in vintage diversification – an outcome otherwise difficult to attain. “Operationally, it’s much simpler. You get valuations and returns more comparable to your other liquid investments, along with the flexibility to adjust your allocation,” she says, cautioning that “this isn’t a product to trade in and out of quickly. It’s designed to make a strategic portfolio allocation more accessible.”

This article features in the “2025 Private Markets” publication.

Investing in Nordic Infrastructure Through Partnership with the Public Sector

Eugeniu Guzun
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Investing in Nordic Infrastructure Through Partnership with the Public Sector

Infrastructure investment is often viewed as a public sector responsibility, heavily influenced by political priorities. However, the growing need for new infrastructure projects – coupled with the urgent renewal of aging assets – has made private capital, particularly from institutional investors, an increasingly vital component. Founded in 2013, infrastructure manager Infranode has pioneered a collaborative approach by partnering with local authorities and mobilizing capital from both institutional investors and public bodies to help build resilient, sustainable infrastructure that serves the long-term needs of society.

Before founding Infranode, the three co-founders – Philip Ajina, Christian Doglia, and Leif Andersson – identified two critical gaps in the Nordic infrastructure universe that lacked a connection. “On the one hand, there was a massive infrastructure investment need across the Nordics – at the municipal, regional, and national levels,” explains Founding Partner Philip Ajina. “On the other hand, Nordic institutional investors were significantly under-allocated to infrastructure as an asset class,” he continues. “We saw two sides with clear investment needs but no bridge to connect them. That was the gap we set out to close.”

“On the one hand, there was a massive infrastructure investment need across the Nordics. On the other hand, Nordic institutional investors were significantly under-allocated to infrastructure as an asset class.” 

Bridging the Nordic Infrastructure Investment Gap

Despite the Nordic region being widely regarded as advanced in many aspects of society –including strong infrastructure – the need for investment stems from two underlying dynamics. “There’s a bit of a conundrum,” says Ajina. “Even with relatively high tax rates across the Nordic countries, the public sector has consistently underfunded reinvestment in infrastructure.” Much of the existing infrastructure, he explains, was built in the 1960s and 1970s and is now approaching or exceeding its technical lifespan.

“Even with relatively high tax rates across the Nordic countries, the public sector has consistently underfunded reinvestment in infrastructure.”

Ajina also highlights that, on paper, the Nordic countries are well positioned to fund such investments. “From a debt-to-GDP perspective, the region has been fiscally sound for many years. Municipalities and regions have their own taxation rights and relatively strong credit profiles and can access capital markets,” notes Ajina. But despite all that, there simply has not been enough investment to keep pace with the natural wear and tear. “The need for renovation remains significant.”

At the same time, the onset of the energy transition in recent years has further intensified the demand for infrastructure investment. “With the Nordics becoming the bedrock of the transition to a more sustainable society, it created two extremely powerful investment drivers,” says Ajina. “That, in turn, has increased the resource pressure on the public sector.” These two forces – the urgent need to renew aging infrastructure and the accelerating energy transition – remain the primary reasons why alternative sources of capital, particularly from institutional investors, are essential. “On top of this, a more recent third force is driving infrastructure investment demand – the geo-politically related resilience of our Nordic countries,” continues Ajina, saying that infrastructure investments in this area also play a key role to strengthen society, for instance, Sweden’s commitments linked to the NATO membership. “These are the same fundamental drivers across all the Nordic countries,” Ajina emphasizes.

“With the Nordics becoming the bedrock of the transition to a more sustainable society, it created two extremely powerful investment drivers.”

Ajina goes on to emphasize that virtually all areas of infrastructure require investment –particularly within the traditional sectors of energy, transportation, digital infrastructure, and social infrastructure, which form the core of Infranode’s investment focus. “Typically, we look for regulated businesses – electricity distribution being a good example – where regulation grants an exclusive concession to operate,” says Ajina. “It’s a protected environment, but also one where the regulator determines how you’re allowed to charge your customers.” He further notes other types of infrastructure that function as natural monopolies. “These businesses often have very high barriers to entry, mainly because infrastructure is a very capex- and balance sheet-heavy sector.” Long-term contracts is also a typical feature in infrastructure investing. “Inflation-linked long-term contracts are quite common in the infrastructure sector.”

Political Realities and Collaborative Investment Models

The founding team at Infranode early on identified a key challenge in the Nordics: despite the substantial investment needs and limited resources – both in terms of capital and sector expertise – fully privatizing critical infrastructure remains highly politically sensitive. “Perhaps the main differentiator between infrastructure and other asset classes is that you’re investing in assets closely tied to society, involving not just citizens but also politicians,” Ajina explains. Because of this dynamic, Infranode aimed to develop a model that enables co-ownership of assets alongside local and regional governments, including municipalities and regions.

“Perhaps the main differentiator between infrastructure and other asset classes is that you’re investing in assets closely tied to society, involving not just citizens but also politicians.”

“This approach has proven to be very effective,” Ajina explains. “Most of the deals we do start with identifying investment needs within the public sector and actively sourcing opportunities. We see that this model is also politically viable for decision makers.” Infranode’s strategy centers on making the majority of its investments contribute to building a stronger society – whether through climate action, social development, or digital innovation. The investments, therefore, are highly attractive both to investors and to society at large, including the decision makers. “This co-ownership model has been essential in unlocking these opportunities,” says Ajina. “As a result, Infranode has become synonymous with being a trusted partner to the public sector.”

A Local Partner Across the Nordics

Infranode also fully owns infrastructure investments by acquiring assets directly from private infrastructure owners and developers. “But what truly sets us apart is our ability to build strong partnerships with the public sector and the trust we have established,” Ajina explains. Because local infrastructure investments inevitably involve politics, Infranode has made a deliberate decision to be a local partner throughout the Nordic region. “We don’t see ourselves merely as a Swedish manager operating in the Nordics; we are a Nordic manager serving the entire region,” he adds. Infranode early on recognized the importance of being perceived as a local partner in each country. “That’s why we have established offices and local teams in every Nordic country.”

Infranode’s infrastructure funds are supported by institutional investors such as  KPA Pension, Folksam, Keva, Kyrkan Pension, AP4 and many others. According to Ajina, “this type of capital is very welcome back into society.” Not only do the beneficiaries of these institutional investors gain from the attractive characteristics of infrastructure investments –such as solid long-term returns, inflation protection, and portfolio diversification – but they also benefit from the tangible, real-world infrastructure these investments help build and maintain. “When these investors consider infrastructure investments through us, they appreciate the sound financial rationale. But they also recognize the added value of returning pension capital to strengthen the local communities where their customers and pensioners live and work. Instead of investing in a port in Sydney, why not invest closer to home, outside of Stockholm?”

“…they also recognize the added value of returning pension capital to strengthen the local communities where their customers and pensioners live and work.”

Building on the appeal to institutional investors, Ajina draws a comparison between infrastructure and real estate returns, noting that the range of return varies depending on the risk profile. “If you look at strategies focused on scaling infrastructure companies, it’s similar to private equity-style investing, where you might expect mid-teen percentage returns,” he explains. “On the other hand, the lower the risk you take, the lower the expected returns.”

Infrastructure is particularly well suited to deliver cash yield returns, making it comparable to a fixed income-like investment strategy. “If you invest in lower-risk infrastructure, a significant majority of your returns will come from steady cash flows. This means you are less dependent on exiting the investment to realize returns, which provides an additional layer of diversification,” further highlights Ajina. He points out that this is especially relevant today, given the current market dynamics where private equity exits are not unfolding as planned.

Whereas in the previous low-interest-rate environment capital was abundant but quality asset opportunities in infrastructure were limited, the balance has now shifted, concludes Ajina. “Now the situation is somewhat reversed, there are more infrastructure needs and investment opportunities than available capital.”

This article features in the “2025 Private Markets” publication.

From Loans to Layers: Navigating the CLO Capital Stack

Eugeniu Guzun
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From Loans to Layers: Navigating the CLO Capital Stack

Collateralized Loan Obligations (CLOs) play an important role in credit markets by bridging the capital needs of corporate borrowers with the return objectives of institutional investors. At their core, these structured vehicles pool hundreds of senior secured loans and repackage them into tranches with varying levels of risk and return. Beyond their structure, CLOs serve two fundamental purposes: they provide efficient financing for companies and offer investors a diverse set of risk-adjusted return opportunities across the capital stack.

“A CLO functions like a mini closed-ended fund, where limited partner (LP) commitments are tranched into AAA- to B-rated securities,” explains Cathy Bevan, Head of Structured Credit and Portfolio Manager at Alcentra. “This structure imposes a strict priority of payments on both principal and interest cash flows generated by the underlying loan portfolio.” That portfolio typically comprises broadly syndicated loans, with average spreads of approximately 320 basis points in the U.S. and 390 in Europe, while the CLOs themselves carry a weighted average cost of capital of around 200 basis points.

“From an equity perspective, investors gain exposure to levered excess spread. From the debt side, CLO tranches offer attractive floating-rate income with built-in structural protections and asset subordination.”

“From an equity perspective, investors gain exposure to levered excess spread,” Bevan continues. “From the debt side, CLO tranches offer attractive floating-rate income with built-in structural protections and asset subordination.”

Tailored Risk and Return Profiles

The CLO structure allows investors to tailor their exposure based on risk appetite and return objectives. Senior tranches offer strong credit protection and stable income, while junior and equity tranches provide higher return potential in exchange for higher risk. “AAA tranches are very remote from risk and are currently trading at base rates [SOFR/EUR] plus 140 basis points – still very attractive, though spreads are tightening,” notes Bevan. “BB tranches, by contrast, are trading around base rates plus 550 to 600 basis points. That’s compelling relative to leveraged loans and high yield, especially given the structural benefit of asset subordination, which shields them from the first losses in the portfolio.”

CLO equity in both the U.S. and Europe is currently trading at an internal rate of return (IRR) of around 13 percent, roughly in line with the yields on European single-B tranches, which offer base rates [SOFR/EUR] plus 900 basis points. Given that CLO equity is more directly exposed to default risk in the underlying loan portfolio, the team at Alcentra currently favors single-B tranches over equity. However, “CLO Equity is in demand at the moment because investors are seeking assets with high cash flow. CLO equity offers this, due to the leveraged interest income,” explains Bevan.

The bulk of the CLO equity return is driven by the excess interest earned on the underlying loans compared to the interest paid out on the CLO’s debt. “Because CLOs employ leverage, that difference – or “excess spread” – gets amplified, generating the majority of the equity returns,” she elaborates. “That cash yield is a key reason why many investors are being drawn to the CLO equity.”

“Because CLOs employ leverage, that difference – or “excess spread” – gets amplified, generating the majority of the equity returns.”

A less discussed risk is the mismatch in non-call periods between the underlying assets and the liabilities. “Underlying loans typically have a non-call period of around six months, while CLO liabilities are often non-callable for 1.5 to 2 years,” explains Bevan. When loan spreads tighten, the loan portfolio can be refinanced quickly, which compresses the excess spread and reduces equity returns – yet the liability costs remain fixed, at least until the expiry of the non-call period. “This erosion of the interest rate arbitrage is a unique risk to CLO equity that many fail to fully account for,” says Bevan. 

For this reason, Alcentra tends to favor purchasing CLO equity in the secondary market. “This strategy often provides more attractive risk-adjusted opportunities compared to investing in primary issuance during tight-spread environments.”

Structural Protection and Volatility as Opportunity

Collateralized Loan Obligation (CLO) debt tranches offer a compelling mix of solid returns and structural credit protection. However, this comes with trade-offs: CLO tranches are more sensitive to market sentiment, exhibiting greater mark-to-market volatility and less liquidity during periods of stress. “Sub-IG CLO tranches offer higher returns than loans or high yield, with the added benefit of first-loss protection,” confirms Bevan. “But when markets widen, CLO tranche discount margins tend to widen even more.”

The longer credit spread duration of CLO debt tranches – relative to broadly syndicated loans – also contributes to their greater price sensitivity. While CLO tranches tend to experience sharper spread widening than loans or high-yield bonds during periods of market dislocation, this volatility can be advantageous, creating attractive entry points. “CLO debt tranches offer better risk-adjusted returns than loans or direct lending from a fundamental standpoint, despite exhibiting higher mark-to-market volatility,” considers Bevan. “We view that volatility as an opportunity, and generally recommend maintaining a core allocation to CLO tranches with the flexibility to increase exposure in times of market dislocation or investing through closed-end vehicles with the ability to draw capital to allocate opportunistically.”

“CLO debt tranches offer better risk-adjusted returns than loans or direct lending from a fundamental standpoint, despite exhibiting higher mark-to-market volatility. We view that volatility as an opportunity…”

While CLO debt tranches are less liquid than broadly syndicated loans or high-yield bonds, they remain relatively tradeable. Dealers often hold inventory and support two-way markets, but a significant proportion of trading volumes occur via bond auctions called “BWICs” (Bids Wanted in Competition). “Given that each CLO is usually around $400–$500 million in total size, you’re unlikely to see observable two-way quotes across a large portion of your CLO tranche portfolio at any given time,” notes Bevan. Still, for allocators who can tolerate some liquidity constraints, CLO tranches offer a compelling long-term return profile, underpinned by strong structural protections and resilient credit fundamentals – making them a valuable component of a diversified income strategy.

Manager Selection: A Crucial Determinant of Returns

When investing in CLOs – especially in mezzanine and equity tranches – choosing the right manager is absolutely critical. “We observe significant dispersion in manager performance, particularly in the US, and this variation becomes increasingly impactful deeper down the CLO capital structure,” notes Bevan. However, she cautions that the label “top-tier” can be misleading; reputation and brand recognition do not always translate into strong performance. Instead, the Alcentra team takes a rigorous approach, “looking through to the underlying credit risk in each portfolio based on our own independent views – not relying solely on rating agency assessments – and evaluating managers accordingly.”

“We observe significant dispersion in manager performance, particularly in the US, and this variation becomes increasingly impactful deeper down the CLO capital structure.”

Assessing a manager’s true quality demands a deeper dive into their credit selection, portfolio construction, and skill in navigating the intricate structural dynamics of a CLO. “Some managers are better at portfolio construction and managing the CLO structure better,” explains Bevan. “Because of the leverage inherent in CLO equity, the portfolio should differ significantly from a typical high-yield or loan fund. Position sizing is crucial, as one large misstep in an overweight name can materially affect the CLO equity’s performance.”

Regional Market Divergence

The European CLO market has been growing at a faster pace than its U.S. counterpart, but the demand for CLO tranches hasn’t expanded at the same rate. “This imbalance creates attractive opportunities for investors like us to buy CLO debt tranches at attractive levels,” notes Bevan. Meanwhile, underlying loan markets in both the U.S. and Europe have experienced limited growth, which in turn pressures the traditional CLO equity arbitrage – the excess interest income generated through leverage. “That dynamic is putting strain on the new issue CLO equity arb, which is why we currently have a preference for single Bs over equity,” she adds.

“This imbalance creates attractive opportunities for investors like us to buy CLO debt tranches at attractive levels.”

Ultimately, CLOs remain a powerful vehicle for accessing diverse credit exposures with tailored risk and return characteristics. Structural protections, enhanced cash yields, and opportunities from market dislocations make them an attractive option for institutional allocators – provided investors apply rigorous manager due diligence.

Views expressed are those of Alcentra as of the date of this article and are subject to change.

This article features in the “2025 Private Markets” publication.

Increasing Hedge Fund Appetite Among Nordic Investors

Eugeniu Guzun
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Increasing Hedge Fund Appetite Among Nordic Investors

Most Nordic institutional investors have exposure to alternative asset classes, including private equity, private debt, and hedge funds. According to a survey by RBC BlueBay of 450 asset owners globally – including 50 from the Nordics – approximately 58 percent of Nordic respondents are invested in hedge funds. They also stand out as the most eager among European investors to increase their hedge fund allocations, with 69 percent planning to do so.

“Looking back, we’ve certainly seen a growth in Nordic investor appetite for alternatives, with allocations rising from approximately 5-10 percent to 20-25 percent of overall portfolios,” says Annica Woronowicz, Head of Nordics at RBC BlueBay. “While domestic real estate and private equity strategies have historically proved most popular, we have in recent years seen a greater willingness amongst investors to consider other sub-asset classes within the universe.”

With average allocations of 7.1 percent – compared to 5.9 percent globally – Nordic investors maintain a relatively high exposure to hedge funds. They are also twice as likely as their global peers (28 percent versus 13 percent) to report allocations exceeding 10 percent. This strong interest is expected to continue, as Nordic investors are the most enthusiastic in Europe about increasing their hedge fund exposure, with 69 percent planning to do so versus 61 percent across Europe.

“In the case of hedge funds specifically, this has been an unloved and under-owned area for the region for some time, mainly due to underperformance.”

“In the case of hedge funds specifically, this has been an unloved and under-owned area for the region for some time, mainly due to underperformance. However, we now see higher interest rates and greater levels of volatility as positive forces driving renewed investor interest,” notes Woronowicz. The survey also found that only 3 percent of Nordic investors expect to reduce their hedge fund exposure, half the proportion of their European counterparts at 6 percent.

The resurgence of market volatility so far in 2025 – fueled by geopolitical tensions and trade disputes – has prompted many institutional investors in the region to adopt a “wait and see” approach, according to Woronowicz. “There’s growing acceptance that the current environment may require a new approach to portfolio construction, highlighting the importance of diversification and active management.” 

The global survey from RBC BlueBay can be accessed here.

Capital Four Reaches Hard Cap for Fifth Private Debt Vintage

Eugeniu Guzun
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Capital Four Reaches Hard Cap for Fifth Private Debt Vintage

Copenhagen-based credit specialist Capital Four has reached the hard cap of €3 billion for its fifth private debt vintage, Private Debt V – Senior. With this latest vintage, Capital Four now manages €8 billion across its Private Credit Platform, comprising €5.1 billion in corporate direct lending and €2.9 billion in infrastructure debt.

Capital Four’s Private Debt V fund secured commitments from a diverse group of investors across 17 countries and four continents. The fund focuses exclusively on first-lien senior secured bilateral financings for private equity-sponsored companies in the Nordics, DACH, and BENELUX regions, targeting businesses with EBITDA of €10-20 million. A significant portion of the loans in the portfolio will be sustainability-linked, ensuring compliance with EU SFDR Article 8. The Private Debt V vintage includes multiple fund structures across various FX share classes, including both a levered fund and an evergreen fund.

“The successful close of our Private Debt V vintage reflects the strength of our long-term relationships and the strong track record of our private debt investment strategy.”Sandro Näf, CEO and Founding Partner at Capital Four.

“We would like to sincerely thank our investors for their continued trust and confidence in Capital Four. The successful close of our Private Debt V vintage reflects the strength of our long-term relationships and the strong track record of our private debt investment strategy,” says Sandro Näf (pictured right), CEO and Founding Partner at Capital Four. “Notably, 26 investors from previous vintages chose to reinvest in the Private Debt V vintage, representing 67 percent of the prior vintage AuM – highlighting the strong belief in our approach and performance.”

At this stage, Capital Four sees a robust deal pipeline extending well beyond the 25 deals already invested within the Private Debt V vintage, which is currently 44 percent deployed. “We are fully committed to deliver best in class investment performance based on continued rigorous implementation of our proven investment process and effective sourcing from our proprietary relationship network,” concludes Näf.

Nordic Investors Point to Private Markets and Equity Exposure as Top Priorities

Eugeniu Guzun
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Nordic Investors Point to Private Markets and Equity Exposure as Top Priorities

Nuveen has published the results of its annual Global Institutional Investor Survey, revealing that 58 percent of the 40 surveyed Nordic investors plan to significantly boost their equity exposure in 2025, compared to just 23 percent in 2024. Additionally, there are intentions to allocate more capital to private markets, infrastructure, and notably, niche private credit investments.

The comprehensive survey includes responses from 800 institutional investors, including investment decision-makers, portfolio managers, and chief investment officers, across 29 countries, collectively managing up to $19 trillion in assets. The survey includes responses from 40 Nordic investors, who collectively manage $740 billion in assets. The Nordic segment of the survey reveals an increasing appeal of long-term and inflation-protected assets. Notably, 65 percent of Nordic investors plan to increase their allocation to private markets, 55 percent aim to invest more in private infrastructure, and 41 percent are seeking exposure to niche private credit investments.

According to Nuveen’s institutional investor uncertainty barometer among global respondents, market uncertainty has decreased from 69 last year to 63 this year. Approximately 80 percent of respondents cite higher volatility and geopolitical conflict as the primary drivers of this uncertainty. Additionally, 28 percent of global investors fear a global recession is likely in 2025. In contrast, 38 percent of Nordic respondents share this concern. When asked about the likelihood of macro events in 2025, 80 percent of Nordic investors anticipate increased market volatility, while 75 percent expect interest rate adjustments and rising geopolitical risk. The remaining respondents were either unsure (the second-highest response) or believe these events are unlikely (the lowest response).

“…Nordic institutional investors are showing a great level of resilience by responding to market uncertainties through diversification into private markets while exploring liquid opportunities…”Alex Hansen, Head of Nordics at Nuveen.

“We have entered a year where market volatility, interest rate fluctuations and geopolitical uncertainty remain present, Nordic institutional investors are showing a great level of resilience by responding to market uncertainties through diversification into private markets while exploring liquid opportunities – balancing risk mitigation with emerging opportunities,” says Alex Hansen, Head of Nordics at Nuveen.

With uncertainty levels declining when the survey was conducted in October and November 2024, investors were actively reallocating “risky assets.” The survey reveals that Nordic institutions are planning to increase their equity and credit exposure while reducing duration and cash allocations over the next 12 months. Specifically, 58 percent of Nordic investors intend to boost their equity exposure, a significant rise from 23 percent in 2024. Additionally, credit exposure is set to increase modestly, with 38 percent of respondents planning to allocate more to credit, up from 35 percent. In contrast, the proportion of respondents planning to increase duration exposure has fallen from 50 percent to 33 percent, while the percentage planning to increase cash exposure has dropped sharply from 30 percent to 15 percent.

The statistics also reveal Nordic investors’ growing interest in private market investments. According to the survey, 65 percent plan to increase allocations to private markets, 55 percent intend to boost their investments in private infrastructure, and 41 percent are expanding into niche private credit opportunities over the next five years. This trend signals the emergence of private markets as a key driver in shaping the future of portfolio construction in the region. Notably, Nordic investors recognize that expanding into private markets and alternative investments brings organizational benefits, such as enhanced investment expertise and a greater ability to stay ahead of emerging trends.

“The emerging asset allocation strategies amongst Nordic institutional investors reflect a proactive stance in optimising portfolio performance in search for higher returns amidst changing economic conditions” says Alex Hansen, Head of Nordics at Nuveen.

A Strategic Lever for Investors Seeking Exposure to Gold

Kamran Ghalitschi
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A Strategic Lever for Investors Seeking Exposure to Gold

The gold market has started 2025 with remarkable momentum, driven by a combination of economic and political turbulence. The return of Donald Trump to the U.S. presidency, ongoing inflation concerns, and central banks’ aggressive gold purchases have reinforced gold’s appeal as a safe-haven asset. In this environment, investors are evaluating whether to invest in physical gold or seek greater opportunities in gold companies.

As highlighted by Charlotte Peuron, a specialized fund manager at Crédit Mutuel Asset Management, gold’s strong upward trend from 2024 has continued into 2025, propelled by geopolitical uncertainties, trade tensions, and inflationary pressures. The announcement of Trump’s policy agenda and executive orders has heightened market uncertainties, prompting investors to turn to gold for stability. As a result, the metal reached a historic peak on February 24, 2025, when it hit an all-time high of $2,956.2 per ounce. Investor demand is surging, with growing interest in Gold ETFs and physical acquisitions. Additionally, China has introduced a pilot program allowing insurance companies to integrate gold into their long-term asset allocation strategies, further strengthening demand. Silver has also seen a strong rise, climbing 12.8% since the beginning of the year to $32.6 per ounce.

While gold’s rally is capturing attention, gold mining companies have outperformed the metal itself. The Nyse Arca Gold Miners index has risen by 22.3% compared to gold’s 10.8% increase as of March 7, 2025. This surge is largely attributed to the strong operational results of mining companies, which have demonstrated disciplined cost control and increasing production efficiency. Rising gold prices are enhancing profit margins, and valuations of many gold companies remain relatively low despite the sustained rally. Investor confidence is growing as companies release optimistic 2025 projections, and analysts are increasingly revising their earnings expectations upward. Significant capital inflows are also returning to gold stocks, as investors seek to benefit from the leverage these companies offer.

Gold has traditionally served as a hedge against economic downturns and market volatility, but investing in gold companies presents a compelling alternative with additional advantages. Unlike physical gold, mining companies benefit not only from rising gold prices but also from revenue and profit generation. Many gold companies maintain strong balance sheets, ensuring positive cash flows and effective cost management. As a result, they are well-positioned to reward shareholders through dividend payments and stock buybacks. Despite recent gains, these companies are still attractively valued, indicating further upside potential as the market adjusts to sustained high gold prices. The industry is also experiencing increased consolidation, with larger firms acquiring smaller players at attractive valuations, driving further growth and efficiency within the sector.

With gold prices reaching new highs and the global economic outlook remaining uncertain, gold remains an attractive investment. However, for those looking to optimize their allocation, gold companies offer an alternative opportunity. Their ability to capitalize on rising gold prices, combined with strong operational performance and shareholder-focused strategies, makes them a potentially superior investment compared to physical gold alone, writes Charlotte Peuron at Crédit Mutuel Asset Management, in a press release.

Picture: (c) jingming-pan—unsplash.com

Benchmark-Plus High-Yield Investing at LD Pensions

Master
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Benchmark-Plus High-Yield Investing at LD Pensions

Stockholm (HedgeNordic) – Danish pension fund LD Pensions manages two separate pension funds, each with different investment horizons. While the allocation across equities, investment-grade bonds, and credits varies between the two funds, a common feature is that high yield accounts for about half of the credit exposure. According to Michael Kjærbye-Thygesen, senior portfolio manager within fixed income and credit at LD Pensions, this is because high yield is one of the most liquid and transparent ways to achieve the desired credit exposure.

LD Pensions manages two funds, the Holiday Allowance Fund overseeing DKK 21 billion, and the Cost-of-Living Allowance Fund managing DKK 25 billion. “The oldest and most mature pension scheme, which has an estimated investment horizon of around ten years, requires a safer asset allocation,” explains Kjærbye-Thygesen. This fund, the Cost-of-Living Allowance Fund, allocates 78 percent to fixed income, including both high-grade securities and credit, with the remaining 22 percent in equities. In contrast, the younger Holiday Allowance Fund has an investment horizon beyond 20 years, allowing for a higher investment risk in the portfolio. This fund allocates 65 percent to equities, 25 percent to credit and 10 percent to the high-grade fixed-income segment.

The credit allocation “serves as a mediator between the higher risk associated with investing in equities and the safer yields from high-grade fixed-income investments,” explains Kjærbye-Thygesen. This credit universe includes high-yield bonds, loans, leveraged credit, and more illiquid credit such as private debt, and opportunistic credit strategies. Despite the varied and diversified nature of the credit spectrum, the fixed-income team at LD Pensions follows a benchmark approach for constructing its portfolio. Slightly over 50 percent of the benchmark is related to the global high-yield index, with the remaining portion related to loans.

“[The credit allocation] serves as a mediator between the higher risk associated with investing in equities and the safer yields from high-grade fixed-income investments.”Michael Kjærbye-Thygesen, senior portfolio manager within fixed income and credit at LD Pensions

The team can deviate from the benchmark exposure both in the short term and the long term, according to Michael Kjærbye-Thygesen. “Our allocation to more illiquid private debt and leveraged credit indicates a shift from our benchmark, which we expect to persist in the longer term,” he explains. Despite this flexibility, high-yield bonds hold the highest weight in the pension fund’s credit portfolio. “This is because high-yield bonds are much more liquid as an asset class and represent the most transparent way to gain the desired credit exposure,” says Kjærbye-Thygesen.

Benchmark-Weight to High-Yield Bonds

As explained by Kjærbye-Thygesen, high-yield bonds offer one of the most liquid credit exposures available, making them the easiest to allocate in and out of. “If we want or need to make tactical asset allocation changes, high-yield bonds are the most accessible option to implement those changes,” Kjærbye-Thygesen asserts. He emphasizes that tactical decisions cannot be implemented quickly with illiquid assets or loans, highlighting the importance of high yield in both tactical and strategic allocations.

However, determining the allocation to high yield involves assessing the “comparable spread and the issue’s position in the borrower’s capital structure.” High-yield bonds occupy the lower part of the capital structure, “and historically, in the event of a default, the losses have been much higher, and the recovery much lower compared to instruments higher in the pecking order.” For that reason, “it is crucial to consider the spread levels on high yield bonds versus other segments, and more importantly, to evaluate if the compensation is appropriate for the risk being undertaken.” This process entails evaluating recent trends in default rates, forecasting defaults, and estimating recovery rates.

“It is crucial to consider the spread levels on high yield bonds versus other segments, and more importantly, to evaluate if the compensation is appropriate for the risk being undertaken.”Michael Kjærbye-Thygesen, senior portfolio manager within fixed income and credit at LD Pensions

Kjærbye-Thygesen and his team currently maintain a neutral position on high yield compared to the overall benchmark, a stance partly influenced by the tighter spreads across markets. “Our perspective is that if spreads go lower, the compensation is not there to justify the risk,” explains the senior portfolio manager. Remaining neutral and maintaining a below-average exposure, Kjærbye-Thygesen adds that “we can remain below average for an extended period.” In a scenario of weakening macroeconomic developments and widening spreads, “our tactical allocation could change.” However, as things stand, “we maintain a neutral position given the level of spreads that we see.” 

Benchmark-Plus Approach to High-Yield Investing

LD Pensions exclusively invests in high-yield bonds through external managers. “We do not invest directly,” explains Kjærbye-Thygesen, “as we believe that managing a high-yield portfolio requires a much larger organization.” Investing directly in high yield “not only requires portfolio managers but also a large team of analysts,” he continues. Therefore, Kjærbye-Thygesen finds it challenging “to build an internal setup for managing high yield, even in a beta-oriented way.”

Kjærbye-Thygesen and his team employ a beta-plus approach to building their exposure to high-yield bonds, which revolves around a systematic high-yield strategy. “This is the core part of our exposure to high yield as we wanted to achieve the same return as the benchmark for the overall asset class,” explains Kjærbye-Thygesen. “It’s not pure beta, rather, it aims to deliver returns after costs on par with the benchmark.” This strategy follows the benchmark using a systematic approach but also allows for deviations, and the manager must demonstrate the ability to rebalance the portfolio in a way that costs do not hinder the attainment of benchmark returns.

“[We opted for a more prudent approach of building] a core allocation to a beta-plus systematic strategy and then selectively choosing active managers who have the flexibility to deviate from the benchmark more actively, thereby creating the alpha required on a smaller scale.”Michael Kjærbye-Thygesen, senior portfolio manager within fixed income and credit at LD Pensions

The rationale behind establishing its primary allocation in high yield through a systematic strategy stems from observations made by Kjærbye-Thygesen that “many high yield managers have struggled to consistently outperform their benchmarks over the past five, seven years.” Despite maintaining faith in active management, LD Pensions opted for a more prudent approach of building a “core allocation to a beta-plus systematic strategy and then selectively choosing active managers who have the flexibility to deviate from the benchmark more actively, thereby creating the alpha required on a smaller scale.”

Despite adopting a benchmark- and systematic-based approach to investing in high yield, Kjærbye-Thygesen still recognizes the value of active management. “We also believe in active management and invest with active managers,” says Kjærbye-Thygesen. The team has also explored the possibility of investing in passive instruments such as exchange-traded funds (ETFs). “We have been investing using ETFs in the past, but the problem is that the costs are still too high, and the beta may not necessarily mirror the benchmark,” explains Kjærbye-Thygesen. While ETFs serve well for short-term tactical allocations, they may not be ideal for longer-term investments. “For longer-term allocation, you need to have a manager in place who can execute trades at a very low-cost basis.”

LD Pensions also favors investing through segregated mandates rather than existing fund structures. This approach enables Kjærbye-Thygesen and his team to “have full transparency into existing investments and make our own exclusions.” Given that high-yield bonds are among the most liquid and transparent credit asset classes, Kjærbye-Thygesen’s team applies the same ESG process as for equities. “We evaluate various ESG factors such as CO2 emissions, worker rights, and controversial weapons,” he explains. “With segregated mandates, we can promptly react to any issues that arise.”

Even though credit spreads in many liquid segments do not adequately compensate for the risk, Kjærbye-Thygesen concludes by asserting that high-yield bonds are “an attractive asset class within the credit portfolio” due to their liquidity, transparency, and strong structure.

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