By Hamlin Lovell, NordicInvestor
Specialist independent investment consultant, COIN Investment Consulting Group, will in 2021 begin a private credit search on behalf of “second tier” Swedish institutional investors. This builds on COIN’s previous searches in infrastructure, reinsurance and real estate. ESG is an important part of the process. Nordic Investor interviewed Jonas Lindgren, Head of Alternatives Manager Selection, for a heads up on the next search.
Lindgren was formerly an alternatives strategist at SEB, where COIN CEO Carl Barnekow, who was previously interviewed by NordicInvestor, also worked. “COIN`s overall offering is meant to cater to all aspects of asset management faced by their clients and is divided into three different areas: strategy, investments and monitoring. With larger institutions this often means one-off niche consultant work within one of these areas whereas smaller investors use the full scope on an ongoing basis. Currently the largest client segment is the Swedish Tier 2 market which typically spans institutions running anywhere between 500 million to 50 000 million SEK (50 million to 5 billion Euros) and includes pension funds, insurance companies, municipalities, counties and foundations.
COIN is distinguished by a focus on alternatives, real assets and illiquids, where its client base typically do not have the resources to carry out their own due diligence across all sub-asset classes and strategies in what is a very diverse universe. “We were frequently asked to do consulting work analyzing a particular asset class and/or due diligence of the manager universe within alternatives. This then led to the concept of pooling several institutions together and being able to provide more in-depth research and due diligence than would be economically feasible had we done the work for a single institution. Simply put, there are economies of scale that work to the benefit of all involved.”
Illiquid Credit Search
The details of the 2021 search are still to be determined, but is not likely to recommend the highest risk sub-strategies. “We believe this asset class has much to offer and could provide exposure to markets that are not included in the universe of listed bonds. Even so, many of the institutions we speak to have limited or no previous experience with the asset class and so might not be well suited to go for the higher risk end of the spectrum”, says Lindgren. “What we have understood from the initial dialogues is the need for a broad overview/understanding of the asset class as well as an understanding of how an investment might fit into their overall ESG/Sustainability restrictions. We have made some initial research into available strategies that cover everything from asset backed to SME-lending and also strategies that include blended-finance solutions (an interesting but fairly limited space from what we have gathered so far)”, says Lindgren.
When it comes to manager selection, managers do not necessarily need to be the biggest names with a huge global footprint: “they could be smaller or local managers, though we would scrutinize those with a lower track record or assets”. As part of the process, COIN has sometimes organized group meetings whereby managers can present to five or ten institutions together
COIN will follow an iterative process in explaining the sub-categories and gaining feedback to narrow down the search. “We have a flexible dialogue with clients and do not present a finished package. The process educates them on what is out there and there is no obligation to invest, our work then aims at giving clients analysis to help them make an informed investment decision”, says Lindgren.
The process will take around 6-8 months, including investment, operational and legal due diligence. It is labour intensive: “we do one or two searches per year and would need to hire more staff to do more searches”.
The infrastructure search narrowed down the sub-sector to renewables and de-carbonisation, and then mapped ESG within that. “We looked at wind, solar, hydro and adjacent technologies, such as the buildout of infrastructure around the electricity grid to help with decarbonization of energy. We focused on equity because most debt strategies would not meet the return target of 7-9%. Of the around 70 managers that were identified, clients selected two, one from Germany and one from the UK”, recalls Lindgren.
The reinsurance search determined that private reinsurance would offer better diversification than publicly traded CAT bonds and reviewed tenders from 15 managers before selecting one.
The real estate search should be completed in late 2020. “We have mapped out the potential manager universe which spans all sectors and strategies. Our work now is to, in detail, go through the options available and present to clients mid-October. Normally we would already have zoomed in on a sub-category within the asset class, to limit the amount of potential options) but with this being a somewhat limited amount we can map out all options available at this stage and then zoom in later when we get feedback from clients. This is more iterative then normal”, says Lindgren.
“One very important aspect, aside from pure risk/return, is ESG. Here we are interested to see how managers are incorporating this into their investment process”, says Lindgren. COIN is a UN PRI signatory.
COIN, which has been in business since 2005, has done ESG searches for traditional equity and fixed income, which highlight ESG metrics, explain how the fund management company works with ESG, and how their process is distinguished from competitors. “We are also now doing ESG mapping for alternatives. It might start with basic exclusions and then go on to managers targeting a return plus impact investing. We have not yet got as far as reporting on the UN SDG goals, but we need to understand how managers act on ESG and sustainability”, says Lindgren.
Blended finance is one example of an illiquid credit strategy that has an ESG element, because profit-seeking investments can be combined with philanthropic funds, often in emerging and frontier markets. The philanthropic capital can also come from governments (such as Denmark’s Government) or intergovernmental organisations, such as the International Finance Corporation (IFC).
We believe this asset class has much to offer and could provide exposure to markets that are not included in the universe of listed bonds.
We have a flexible dialogue with clients and do not present a finished package.
Blended finance is one example of an illiquid credit strategy that has an ESG element.