By Hamlin Lovell, NordicInvestor

This article forms part of our upcoming report on Alternative Fixed Income

Mandatum Asset Management (“MAM”) is the asset management arm of Sampo Group, a significant insurance group in the Nordics. MAM offers discretionary and consultative asset management and manages a variety of investment products within its core areas of credit, alternatives and equity selection.  In total, MAM manages €29 billion in client and balance sheet assets. MAM has been allocating to private debt strategies from the group’s balance sheets since 2008 and external client capital since 2015, and MAM currently has approximately over EUR 3 billion committed to private debt. NordicInvestor asked MAM’s Head of Private Debt and Real Estate, Jussi Tanninen, how the strategy is adapting to the new economic and financial market climate.

MAM expects to get some yield pickup from private and alternative credit throughout the cycle, which can also be used to balance an equity-heavy portfolio “At specific points of the cycle, opportunistic private credit can be countercyclical in offering opportunities to take advantage of market turbulence and obtain higher returns. We have a strategic allocation, which means we are on autopilot to take advantage of these situations,” says Tanninen.

In the current interest rate climate, the fact that most private credit is floating rate is also advantageous as one does not have to worry about duration risk.

The range of returns targeted from direct lending is between mid-single digit and mid-teens, and has increased somewhat this year: “in 2022, the floating rate element of returns has obviously picked up, though spreads have not yet risen as much as in public credit,”says Tanninen.

Some investors estimate a yield pickup per turn of leverage, but Tanninen does not find this very useful because there is also wide yield dispersion within direct lending markets: “smaller companies and more complex deals can yield much more than more mainstream mid-market lending or leveraged loans deals per turn of leverage, however, they can also be riskier”. He also finds it difficult to split the yield pickup between premiums for illiquidity, complexity, sourcing, structuring and so on, but overall judges that the extra return is attractive.

As an insurer, Mandatum Life (MAM’s sister company, also part of Sampo Group) is covered by Solvency II rules, though these are not the primary driver: “the Solvency II accounting treatment for private debt is also quite favourable, though for us, optimizing risk adjusted returns rather than Solvency II is the priority,” says Tanninen.

Allocations tailored to clients

MAM allocates across direct lending, specialty finance, and asset backed lending.

“The size of private credit allocations cannot be generalized since it is tailored to individual client preferences and risk and liquidity constraints. On average, allocations are being held fairly constant and clients with a tolerance for illiquidity can clearly pick up extra returns,” says Tanninen.

Cash could be held in money market funds while awaiting the next few years of capital calls, though again the options depend on clients’ asset/liability profiles and risk preferences. “Some clients could hold medium term cash in leveraged loans or open-ended real estate funds, which might have quarterly liquidity. The balance amongst daily, monthly, quarterly, annual funds and multi-year lock ups varies by client,” explains Tanninen.

Fund liquidity alignment

However, for some asset classes such as private debt, MAM prefers closed-end funds with multi-year lockups. “Generally, we want to avoid the potential for a liquidity mismatch in open-ended funds or those with shorter liquidity terms than the underlying assets,” says Tanninen.

Secondary markets, in both individual private loans and private lending funds, might allow investors to exit before the contractual maturity, but MAM is not availing of these: “there are always information asymmetries so we are generally quite cautious in these situations,” says Tanninen.

Volatility spells opportunity

MAM considers macroeconomic, monetary policy, corporate default and consumer default risks, but in general, Tanninen has found that short term pullbacks and selloffs actually present opportunities: “illiquid funds do not need to sell off their assets, but they can make exceptional investments from others who are forced sellers, including funds with daily dealing. In comparison, private equity could not benefit from Covid – because the selloff was too brief and nobody was selling – whereas private debt was able to”.

If the economy deteriorates to the point where defaults start increasing, private lending can also bring advantages: “the bilateral lenders who have structured documents appropriately can also be well positioned to swiftly restructure loans in a straightforward conversation without additional lenders and just one main owner in the company, and without the complication of dealing with multiple groups of creditors and shareholders,” points out Tanninen.

A more adverse scenario would be a deep and extended recession or even a depression, which could create risks of losses on some loans regardless of whether they are private or not.

ESG is tailored and rapidly evolving

MAM has developed a proprietary ESG survey of over 100 questions, which external managers complete during due diligence and annually. “That said, there is no one size fits all. A large cap buyout fund will be different from an SME lending fund also in terms of ESG,” says Tanninen.

But generalisations can be made in some areas. “Disclosures under SFDR 8 are now the norm for European direct lending. We find SFDR 8 does make our due diligence easier, though we do make an overall assessment and can consider SFDR 6 as well,” he explains.

SFDR 9 is much scarcer: “so far, the only we have seen only very few SFDR 9 strategies. Our own leveraged loan strategy is SFDR 9 and makes impact assessments in a special way,” he points out.

Managers are focused on various social and environmental SDGs. “Some managers are reporting carbon footprints for the first time, and this should become mainstream over time. The ambition levels are definitely there,” he sees.

Networking sources managers in the Nordics and beyond

Networking and relationships are the main methods for sourcing managers. “We know lots of investors in the Nordics and have a regular dialogue, which generates interesting leads. Elsewhere, we also make use of our networks. In Spain, a real estate manager provided a useful reference regarding our direct lending manager,” says Tanninen.

MAM is open minded about meeting new managers and do so every year, but the bar can be quite high for allocations. They can consider prior career track records and it can be useful to have known the managers before.

In common with many Nordic institutions, external consultants are normally used only for tax and legal advice, with due diligence done in-house.

Vehicles and domiciles avoid tax or AML controversies

There is no hard ceiling on what percentage of a vehicle MAM might make up, “but anything more than 10-15% would be anomalous and even then, we would need to be very sure about it,” says Tanninen.

Domiciles should avoid controversial issues, such as appearing on EU lists of “non-cooperative” jurisdictions that can be dubbed as “tax havens”, or on other lists of domiciles deemed to have “high risk” AML (anti-money laundering) procedures. “We are good corporate citizens,” says Tanninen.

Confirmatory due diligence is also carried out to ensure that taxation and costs at the fund-level are acceptable. If there were complications such as US withholding taxes, that would need to be considered.


“We are not big believers in tactical allocations since nobody has perfect information and this is especially difficult in private markets. But all investors who can handle illiquidity should have a strategic allocation to private debt to improve risk-adjusted returns,” concludes Tanninen.