Mandatum Life is a fully owned subsidiary of Finland’s publicly listed Sampo. Its other fully-owned subsidiary is IF, the largest P&C Insurance company in the Nordic Countries. In total the Group has assets under management of EUR 22 billion. Mandatum has been allocating client capital and proprietary capital to private debt strategies since 2008, and currently has approximately EUR 1.5 billion invested in the space. NordicInvestor asked Mandatum’s Head of Alternatives, Jussi Tanninen (pictured above), and its portfolio manager for private debt, Matias Hauru, what they seek from external managers.
Mandatum researches at least 100 private debt managers each year and allocates to between 6 and 8, with a wide range of return targets. “The private debt market is broad and targeted returns vary a lot between sub-segments. Return targets could range from 6% for a more conservative strategy to 10% or even 15% for a more complex strategy or one focused on smaller companies. This means that some private debt strategies can offer returns comparable to private equity”, says Tanninen.
Mandatum allocates to managers in the US and Europe. Until recently, the high cost of hedging from USD back to EUR meant that the US allocation had to focus on more complex strategies offering higher yields, such as distressed debt or special situations. Now, the drop in US interest rates means that the US and European strategies can be more evenly balanced in terms of risk profiles.
The geographic split is only one aspect of diversification. “We want to be diversified over multiple segments and funds. We diversify by lender, timing of vintages, and strategy. We build a portfolio of private debt funds with different sources of risk and return. We are taking a longer-term view”, says Hauru. Mandatum mainly invest in the longer duration space, in closed end funds with maturities of between three and ten years.
Covenants and collateral
Mandatum has allocated to funds lending against cashflows or assets (though their real estate debt comes under the umbrella of their real estate portfolios).
Stronger covenant protection is a key attraction of direct lending relative to public credit markets. “In the bond and loan markets, we have not had proper maintenance covenants for a while now, but still have them in the direct lending market. Terms in direct lending had been deteriorating a bit, but early indications show that this has stopped or reversed since Covid 19”, says Hauru.
Collateralisation can also be much better in private markets: “even before Covid, we were very cautious on private equity related buyout debt due to the multiples. Leverage multiples in public credit markets had been escalating to all-time highs in 2019, even before the earnings add backs, which were in some cases completely ridiculous for syndicated loans”, says Tanninen.