Personal note: This article doesn't address it, but I think this has application to crowdfunding and private money. Deeper pools of cash (like pensions) are looking for a high-yielding parking lot, which may eventually include personal loans in one form or another. Some banks are already using sites like LendingClub.com to take advantage of higher interest rates.
Pensions Seek Bond
Alternatives
January
16, 2015
More than a half
decade after the global financial crisis, the traditional mantra that one makes
money in the stock market and keeps it in the bond market doesn’t apply. The
tectonic shift holds implications for institutional asset owners such as pensions, endowments and
foundations.
Once they’ve booked these
gains, however, institutions are faced with the challenge of redeploying
capital into a low-rate environment. The traditional method of dealing with
this problem — moving down on credit quality or increasing leverage — may not
be an option, as all-in rates on lower-quality instruments have fallen to the
point where they no longer compensate for the increased risk.
As
a consequence, asset managers are reassessing the need for marketability in
their portfolios, and are turning to less traditional forms of credit such as
short-term corporate receivables and municipal tax liens.
“When we talk to our
clientele about it, something has to give, and what has to give is
marketability,” said Siller. “As long as you’re getting regular cash flow to
meet your liabilities, marketability isn’t so important, especially in a true
crisis where your bond marketability is going to be as impaired as the
marketability of any of your stocks.”
Just
as private equity has been widely incorporated into the
asset allocation of most institutional funds, so too will private credit strategies
find their place among allocations in large diversified investment pools,
Siller added.
Private
credit strategies have several characteristics: high credit quality, reliable
cash flow, low volatility,
outsize yields reflective of inefficient asset pricing, and diversification
from the capital markets.
“We are very interested in
non-correlation, which is a reaction that everyone has had to the financial
crisis,” said Siller. “The easy way to get higher yields is to take on more
risks, but you could have always done that. You could have always bought junk
bonds if you wanted a higher yield.”
One
of the private credit strategies that Broadriver employs is short-term corporate
receivables, which traditionally went directly to the commercial paper market,
but now are constrained from doing so.
“The
commercial paper market has really changed, post-financial crisis, and that
market has in fact withered,” said Broadriver co-CEO Andrew Plevin. “Part of
the desirability of going to the commercial paper market was that it got the
assets off your balance sheet and helped improve returns on assets. That was
challenged by the accounting profession.”
As
a result, corporate receivables are being sold directly via trading venues such
as The Receivables Exchange, an online marketplace for U.S. receivables sales,
which has formed a strategic alliance with NYSE Euronext to market its
Corporate Receivables Program to potential accounts receivable sellers,
including NYSE-listed companies.
“Instead
of going to commercial paper, corporations are now selling their high-grade
receivables directly, and that’s a really interesting market, especially for
people who want short-term return,” said Plevin.
Another
private credit strategy that Broadriver employs is “longevity assets,” whereby
insurance companies essentially lay off their pools of longevity risk to
institutional investors. Longevity assets provide high-quality credit, low
volatility, and reliable cash flows at attention-grabbing yields.
“These
are risks on life insurance, and there is an aftermarket for that,” said
Siller. “Here we are generally looking at 10 to 12 year type durations. Our
counterparties are investment grade life insurance carriers and the returns are
in the low teens generally.”
http://marketsmedia.com/pensions-seek-bond-alternatives/