ASHBURTON: Expert Opinions: Edition October 2019 / January 2020


A change in the tide

There’s a new wave of investor engagement, suggests
Ashburton Investments head of legal Alessandro Scalco.

There’s a new wave of investor engagement, suggests Ashburton Investments head of

legal Alessandro Scalco.

Stakeholder activism has traditionally been associated with equity investment. But with investors and asset managers seeking ways to protect against the downside risk of the listed-equity markets and to access diverse return sources, the use of alternative asset classes has become more attractive.

The result of this shift in the market cycle is the emergence of a new wave of stakeholder activism in these alternative asset classes. It looks and feels like traditional stakeholder activism but tastes different. Take corporate loans, also referred to as private debt:

Background to the rise

For several years, the loan market has predominately been the domain of banks. However, with adoption of the various Basel regulatory standards, banks have been syndicating the loans they originate to third parties to free up capital on their balance sheets to write more business. At the time of drafting the various pieces of SA legislation governing pension funds – as well as collective investment schemes and insurance companies — loans were not included as a type of asset/security that could be part of these entities’ asset allocation by the regulator.

Nonetheless, asset managers indirectly gained access to loans from using acceptable investment vehicles/structures such as repack vehiclaes, credit linked notes and linked policies.

These vehicles are often managed by asset managers who also manage the assets of the entities. In some cases, the asset manager will manage loans on behalf of a client on a segregated mandate basis. But in all these cases the entity or client becomes the lender of record alongside the loan-originating bank. This results in the asset manager now sitting alongside the banks (and other financial institutions) on lender decisions.

As assets under management have grown (which are linked to underlying entities’ assets under management), so too has the ability of the asset manager to take a bigger exposure to these types of assets. With this, we now see asset managers starting to have exposures to corporate loans. This is significant. It requires that the banks take heed of the asset managers who can affect, or even block, decisions related to the underlying loans.

Attention to ESG

Asset managers are no strangers to stakeholder activism. Globally there is also a growing focus on Environmental, Social & Governance (ESG) elements. With the greater exposure to corporate loans, asset managers are increasingly assuming a stakeholder-activism role in asking the tough ESG questions of potential and existing borrowers.

Inherent in the rise of this new form of stakeholder activism is a tension between borrowers, banks and asset managers. Under the FAIS legislation, asset managers are fiduciaries. They need to act in a fiduciary capacity towards their clients, whereas banks are not under the same legal obligation (although they still need to protect depositors’ monies).

The banks also often have a wider relationship with the borrower, such as a banking relationship, which may be considered in requests from the borrower. While asset managers may have exposure to the borrower via equity or even exposure to another loan of the borrower, asset managers approach lender requests under the loans with different considerations.

Scalco . . . look at loans market

Going forward

Alternative assets will become more relevant in investors’ portfolios. It means that asset managers need to ensure that they have an in-depth understanding of these asset classes. Importantly, a thorough upfront due-diligence process — taking into account all factors including ESG – is undertaken prior to any investments.

They are affected by the buy and hold nature of these assets given the limited liquidity embedded in them, loan portfolio concentration and reinvestment risks. This due diligence is achieved through strong credit committees and a depth of knowledge in the investment team responsible for approving and monitoring the transaction, and potentially managing a workout scenario if the company defaults on its loan covenants.

This can and will mean that asset managers can further the call for sustainable investing by taking steps to measure and report on the positions they have taken in holding borrowers to account on ESG issues, but at the same time offering their investors further diversification and protection from the risk of traditional asset classes.