Schroders Private Assets Media Summit 2021: Tackling zero rates

With interest rates and yields globally at record lows investors are well placed to broaden their investment focuses, journalists at Schroders Private Assets Media Summit heard.

Natalie Howard, Head of Real Estate Debt, Schroders Capital, commented:

“Appetite has grown for niche areas that offered genuinely differentiated sources of return.

“Traditional sources of financing began to dwindle after the Global Financial Crisis, particularly as banks reined in their lending amid closer regulatory scrutiny. But the need for real estate loans remained.

“Indeed, the medium-term outlook for real estate overall is positive, with vacancy rates at record-lows in a number of areas.

“The opportunity presented by the increasing need for alternative lenders puts investors in real estate debt in an advantageous position, further supported by the complexity premium that the asset class can help generate.”

Stephan Ruoff, Global Head of Insurance-Linked Securities (ILS), Schroders Capital, commented:

“ILS builds new bridges between risk transfer and capital markets in order to protect the global economy and contribute to global resilience and support the path to net zero.

“Due to the low interest rate environment and following a number of heavy natural catastrophe years, (re-)insurance risk is priced very attractively. Putting this together with the uncorrelated nature of the asset class and its short duration, especially in the publicly traded segment, we see strong interest from investors.

“Furthermore the case for ILS is also supported by sustainable investing which is front and centre of ILS. This is driven by the net zero challenges not only on the interest rate side, but also the growing global push towards a net zero carbon footprint.”

Michelle Russell-Dowe, Global Head of Securitised Products and Asset Based Finance, Schroders Capital, commented:

“Global central bank intervention has created conditions in traditional asset classes where investors are taking more risk and being paid less to do so. With late cycle valuations in traditional assets classes and with global interest rates at historically low levels, today’s environment, #TheZero, requires new thinking around how to generate attractive risk adjusted returns.

“We believe this is the time to benefit from diversity of risk premium, more risks, not more risk. Asset-based financing and securitised products offer access to a diverse set of risk premia given the global spectrum of exposures crossing through consumer lending, business lending, housing and real estate. This diverse asset class offers a variety of exposures including: credit risk premium where fundamentals are sound, prepayment risk premium, complexity premium and liquidity premium.

“We benefit from the flexibility to allocate where risk is most attractively priced, where inefficiency is present and where banks or other regulated capital providers have been disintermediated. We can access attractive fundamentals through liquid public securities, less visible private securities, by financing the asset, or by lending directly. As we look across the spectrum today, it is the less visible assets and financing opportunities that are most attractive. But this cycle is remarkable for the speed at which it is progressing, so the flexibility to allocate where opportunity is present, is key.”

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