Alternatives, from ELTIF 2.0 a decisive boost to private credit
A year after the debut of the EU regulation, the segment continues to offer opportunities. But, according to Ogunlana (M&G Investments), the Trump effect could disrupt the current scenario. Here's the strategy of her dedicated fund
by Giulio Zangrandi
Private markets continue to grow and capture the attention of investors. As forecasted in a recent report by Bain & Co, the share of retail capital in this universe is expected to triple within five years and reach nearly 13% by 2024. A trajectory made possible also by the ELTIF 2.0 regulation, which has enabled the creation of semi-liquid vehicles and provided the boost toward democratization of the sector. This is well understood at M&G Investments, where confidence in the success of the new European framework was strong enough to prompt the early launch of a dedicated fund called Corporate Credit Opportunities ELTIF. FocusRisparmio spoke with Aramide Ogunlana, investment specialist director for Private Credit at the company, to analyze this product and explore how the trend may continue.
It’s been just over a year since the ELTIF 2.0 regulation came into effect. How has the private credit landscape evolved since then, and how has your offering changed?
The core of the philosophy of the ELTIF framework is well structured, regulated access to private assets for a broader investor base, and it is a philosophy we align with. The enhancements in ELTIF 2.0, allowing for semi-liquid structures, have provided the liquidity that is often a requirement for a broader investor base. As a result, we have been seeing good traction with new investors across Europe and a lot of private credit houses entering the ELTIF space. We are very supportive of the initiative and the benefits ELTIFs will bring to European investors and economies. We expect the segment to continue to grow as more investors gain meaningful access to the benefits of allocating to private assets. However, this will not happen overnight; it will take time, sector-wide collaboration, education and innovation, as new investment propositions normally do. The M&G credit academy is a clear expression of our commitment to this. It’s important to be forward looking and recognize the opportunities in this sector, we hope to empower our clients to broaden their investment tool kit to suit their unique investment objectives.
How is the M&G Corporate Credit Opportunities ELTIF structured, and which is its investment strategy?
We were well prepared ahead of the roll out of ELTIF 2.0 in January 2024. We launched our fund, the first semi-liquid private credit ELTIF in October 2023 already structured with ELTIF 2.0 requirements. The strategy aims to provide flexible exposure across the broad spectrum of private corporate credit in Europe, from lower mid-market direct lending to large cap broadly syndicated loans sourcing across a large universe with a strong focus on liquidity. Though semi-liquid is a positive step for the market, this needs to be balanced with a disciplined approach. We aim to fulfill this through natural liquidity such as asset cashflows, repayments and daily tradability, rather than via liquidity management tools which can break in a downturn.
What opportunities does European private credit currently offer to investors?
The global private credit market is over $1.5tn market, with forecasts indicating the market will grow to $3tn by 2028. This represents a significant investment opportunity which the M&G Corporate Credit Opportunities ELTIF plans to actively exploit. The private credit market is largely floating rate ergo income driven assets class with significantly lower MTM volatility. This is not unregulated lending in the shadows but lending to good quality companies with resilient business models and a reason to exist. Where credit markets have uniformly tightened from a top-down long-term perspective despite the current dislocation, private credit is still wide to long term levels, and there’s scope for 8%+ yields without taking on undue credit risk via a well-diversified, conservative senior secured positioning.
Which prospects do you see for this segment in the current scenario? To what extent can Trump’s policies influence this environment? Are there any further factors to be monitored?
We are living in tumultuous times, where an emerging new world order of protectionism is developing. The full consequences are known unknowns and will take time to unfold. Despite the uncertainty, this is a time when the fundamental prospects of the European private credit market look comparatively attractive yields of 8-10% with contained credit risk. Defaults are expected to remain low in the 1-2% region by year end. We are bottom-up value credit selectors, our focus remains on assessing the inherent qualities of the companies within the universe and their durability when it comes to debt service even in macro stress scenarios. We expect companies will endure a period of higher input prices, so ability to absorb and pass through costs are important, alongside impact on consumer purchasing decisions in light of higher finished goods costs.
According to Scope’s ranking on ELTIF accessibility, Italy ranks first (39%), followed by Germany (23%), France (11%), and Spain (8%). Which is the reason behind this success, and what can be done to improve it further?
We’ve certainly been seeing a lot of traction across all regions. ELTIFs benefit from an EU marketing passport which is attractive from a scalability perspective, but country specific regulations and tax implications differ and can favour local domiciled ELTIF vehicles more. We have seen that as a relative factor in France and Spain to an extent versus Italy and Germany.
What role does Italy play for M&G in the ELTIF market? What kind of investors are you being approached by in terms of ELTIF 2.0 products in the Italian market?
Italy is a key European market for M&G. We have a 20 year track record in the region with 20.1 billion managed on behalf of a diversified client base. As you mentioned earlier Italy is currently the most active market in accessing ELTIF and we also see that reflected in our flows. We’re seeing interest from wide range of clients including private banking networks, distributor banks, family offices and institutional clients.