How private debt strategies can help increase diversification and reduce correlation

Co-Chief Investment Officer and Senior Portfolio Manager at Sprott Asset Management, Scott Colbourne, gives his view of the private debt space

With attractive returns being difficult to find in traditional areas, Canadian advisors are being forced to think outside of the box to keep their clients happy. Options are limited and increasing numbers of advisors are looking for alternative income streams to generate the type of yield that Canadian investors have come to expect. One particular area of interest for investors in 2016 has been private debt investments.
“The traditional Canadian bond funds don’t provide an appropriate risk-return trade off any more,” says Scott Colbourne, Co-Chief Investment Officer and Senior Portfolio Manager at Sprott Asset Management. “It’s been a struggle, and that’s why the area of private debt is growing. Since 2006, it’s grown from US$100 billion to just shy of US$600 billion. Private debt strategies help investors to generate some real income, diversify their portfolio and experience less volatility.”
The opportunities available in private debt reflect current market forces and the changing financial landscape since the financial crisis. Banks are now much more heavily regulated and, as a consequence, have had to withdraw from certain lines of business to increase their capital. “Many of the banks have withdrawn from mid-market lending abandoned their private strategies, and it’s not because they no longer find them attractive,” Colbourne says. “As a result, the private debt market has grown and other investors have been able to benefit from the banks’ exit.”
Although private debt investments are a great way to achieve diversification and reduce correlation, some investors find the trade-off between liquidity and return too much of a hurdle. In response to the apprehension around illiquidity, asset managers have created funds that offer investors more liquid ways to access private debt. “There’s a particular fund that comprises two thirds private debt and one third liquid strategies,” Colbourne says. “That’s a good entry point for people looking to get the returns of a private debt strategy but with better liquidity.”
In an attempt to educate wealth professionals on what can be a complex space, Sprott Asset Management will host a free webinar on private debt strategies on October 25th. The webinar will highlight why private debt is a good option and outline some effective strategies in close detail. As part of the webinar, Colbourne and Senior Vice President, Alternative Income, Ramesh Kashyap will feature in a Q & A.
“Those who attend will get a real sense of the private debt market and the opportunities available, both in Canada and the US,” Colbourne says. “Sprott has been involved in private debt for over six years and we think it’s an attractive space. This is a good opportunity for us to highlight the opportunities, advantages and challenges associated with the asset class.”