The private debt market is a story of growth, evolving from the ashes of the global financial crisis to become an asset class in its own right. AlphaWeek’s Greg Winterton spoke with Craig Reeves, founder of private debt investor Prestige Funds, to learn more about what he sees in the space.

GW: Craig, one of the biggest geopolitical stories right now is energy security. Which sectors lend themselves to supporting this objective, and why is private debt a compelling method of financing?

CR: High gas and electricity prices have now become a major concern and are in the news in the UK. Part of the problem stems from underinvestment and insufficient incentives for the clean energy sector for some time now. We provide loan capital to biogas energy projects across the UK, which are designed to provide farms and rural communities with a clean source of renewable energy. Indeed, we are approaching the point where cities in the UK will be able to generate electricity from the waste they produce. But the funding required for this does not come from commercial banks – it comes from the private loan market.

GW: Still on the ESG theme, there are many potential investments that can support an investor’s ESG mandate. What are some of the other sectors where you see demand for private debt solutions?

CR: Private debt has become a major source of essential funding in the UK for small and medium-sized businesses. These companies are the main employers in the UK. Since 2008 and the financial crisis, it has been increasingly difficult for them to interact with the banking sector. Private loans provide companies with essential and secure lines of capital to finance their growth. During the pandemic, our lending partners have been very active in rolling out government support through our network to businesses that need it most. There is a strong social component here, because this activity contributed to maintaining employment, and still does.

Craig Reeves

GW: At a changing pace, the demand for Shariah-compliant investment solutions from an ever-growing private wealth sector in the Middle East continues apace. What opportunities are Middle Eastern investors interested in and why?

CR: Islamic investors have many of the same criteria as those following a strong ESG mandate. We have seen a growing appetite in the Middle East for a fund that meets Sharia criteria, but can be supported by a portfolio of green energy projects. We summed it up in the launch of our Premium fund Alziraea earlier this year. Islamic investors value the consistent return that renewable energy projects can provide, coupled with the strong social and environmental elements that come with them. Our lending partners were able, in the case of Premium Alziraea, to develop selection criteria for projects likely to satisfy a Sharia specialist.

GW: Part of the private debt talk has been that these products have generated real returns for investors, but given current levels of inflation, that’s often not the case. Everyone is hoping that current inflation levels will recede, but what are some of the concerns you hear from LPs about private debt and what is your response?

CR: Investors always want higher returns, but that’s also a factor of risk and liquidity. We could probably lend money at 50% per year but the risk would be significantly higher and the ultimate exit could be longer and more complex. Private debt remains an increasingly essential and complementary alternative to traditional bond strategies, but generally with superior risk-adjusted returns and low volatility. We have seen throughout the pandemic and more recently the war-led inflationary environment that many risky assets have become much more volatile and correlated to each other.

GW: Finally, Craig, a private debt bull would say that the asset class has now proven its resilience in the sense that it has now been through two crises – the Covid-19 pandemic and the current geopolitical turmoil – all of which are two still ongoing. What’s the message to LPs who haven’t boarded yet?

CR: Private debt really came out of the 2008 financial crisis; we launched our business then, and the change we saw over the next 15 years was one of the changes in the changing commercial lending landscape. This is partly due to new regulatory requirements imposed on large banks. It has created more opportunities for investors, and private debt has moved from a niche of alternative investment portfolios to a component that ranks alongside infrastructure and private equity in terms of allocations. Investors also continue to seek yield; yes, we have higher inflation, but real returns are still very low. Preqin predicts that the private debt sector will continue to grow and double in size by 2026. This is a very good place for fund managers and investors.

Craig Reeves is Founder at Prestige Fund