Private Market Art. 9 Remain Resilient During Second Half of 2023

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    Stockholm (NordSIP) – Following NordSIP’s review of the performance of international public equity and fixed-income funds, we approached a range of international and Nordic private debt and private equity Article 9 funds to hear about their experiences during the second half of 2023 and for the full year.

    Our survey covered six private market funds. Four Article 9 private debt funds replied to our inquiries: the Cardano Impact Financial Inclusion Fund, the responsAbility SICAV (Lux) Agriculture Fund, the responsAbility SICAV (LUX) Micro and SME Finance Debt Fund, the Trill Impact DWM SDG Credit Fund. Their replies were complemented by feedback from the portfolio managers of two Article 9 SFDR private equity funds: the Kempen Global Impact Pool and the Kempen SDG Farmland Fund.

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    Performance-wise, most funds were able to generate positive returns both during the second half of the year as well as for the full year. The feedback suggests financial and geopolitical instability created a challenging environment. While some private equity funds struggled in this environment, private debt markets were resilient and focused on financial inclusion. On the agriculture front, the focus was on olive oil, cocoa and coffee.

    Source: fund managers


    Continuity and Diversification

    Viktor Andersson emphasises stability and continuity in the performance of the Trill Impact DWM SDG Credit fund. “The larger trends have remained the same. We continue to get good pricing in our local currency lending, and the EUR rates are coming up somewhat as well to attractive levels. The currencies of the countries surrounding Russia are looking less attractive now due to the performance of the Russian economy and currency,” Andersson says.

    “As always, a well-diversified portfolio is key, and the ability to select good credits. We have no major credit events, which adds to our performance,” he adds.

    Financial Inclusion, Loss and Recovery Rates

    According to Sinisa Vukic, Senior Portfolio Manager of the ACTIAM Financial Inclusion Fund, the growth of his market segment and quality financial institutions played a key role in the fund’s performance.

    “In general, the financial inclusion market printed very solid returns in 2023. The market grew by some 12%, although with regional unevenness. In the second part of the year, our focus remained as usual on high-quality financial institutions that make real impact contributions. From the portfolio perspective, we aim to further diversify the portfolio and we achieved this by adding a few new names form Asia i.e. Philippines, India and Indonesia. All these deal are local currency and are hedged to EUR. We observed that for local currencies hedging cost are more favourable than others. That’s why we focused on selective number of local currencies that have provided high yield opportunities for the fund,” Vukic tells NordSIP.

    According to Vukic, four factors help explain the fund’s performance. Exposure to over 50 underlying financial institutions spread across 27 countries provides Cardano with a highly diversified portfolio of investments. “We aim to invest in financial institutions with a clear and compelling strategy for achieving long‐term sustainability. Specifically, we look at the business mix, income stability, and market position. Revenue diversification, geographic and industry diversification, and customer concentrations on either the asset or liability side of the balance sheet are important,” Vukic says.

    The fund also enjoys a low loss rate and a high recovery rate. “The Fund loss rate is 15bps per annum. Such loss rate is rather low compared to the industry and peers,” Vukic adds. “We have a recovery rate of over 90% on the loans that have been in workout. The Cardano team has provided over 1000 private loans in the past 16 years to EM-based financial institutions and projects.  Within the strategy, we support financial institutions and projects that have strong shareholders, are regulated, creditworthy and have a dedicated impact focus. A thorough due diligence (DD) process is done by each investment. Afterwards, yearly due diligence reviews and monthly financial monitoring are performed. Of the 1000 loans just 13 needed to be worked out. Such active and frequent monitoring helped us to detect potential financial distress in an early stage. In addition, strong covenant and security packages have been supportive in the workouts,” Vukic continues.

    Lastly, the fund applies an effective hedging policy. “Cardano aims not to take on currency risk and hedge it where possible and commercially viable. That said all USD-denominated loans are hedged to EUR. The USD-denominated loans are dominant in the portfolio (60-70% of the portfolio). Alongside, the Fund holds EUR and local currency-denominated loans. Wherever possible and commercially viable direct hedging of a local currency to EUR is implemented. This is in particular seen in more liquid currency markets (INR, IDR, PEN,  etc..) using for example Non-Deliverable Forward transactions,” Vukic notes.

    Financial Inclusion and Geopolitical Risk

    At responsAbility, the focus was on the resilience of financial inclusion despite geopolitical instability.  “The fund capitalized its access to markets where local interest rates did not move along with US rates. In particular, we would like to highlight that despite heightened geo-political risks due to Israeli military action against Hamas, as well as a regional conflict between Azerbaijan and Armenia, the fund’s investment portfolio remained resilient,” Jaskirat Chadha, Head of Financial Institutions Debt at responsibility tells NordSIP, with regards to the responsAbility SICAV (LUX) Micro and SME Finance Debt Fund.

    Jaskirat Chadha, responsibility

    “The fund’s performance in 2H 2023 can be credited to its diversified investment strategy across emerging markets and its focus on financial-inclusion lenders. The fund’s resilience in the face of geopolitical risks and its ability to maintain a diversified portfolio across more than 50 countries were key factors in its performance. The continued yield catch-up following rate hikes, alongside a resilient investment portfolio, underscored the fund’s strategic effectiveness,” Chadha adds.


    Difficult Environment and Biodiversity for Private Equity

    Speaking as managers of sustainable private equity investments, portfolio managers at Kempen pointed to a challenging market environment which complicates fund-raising and IPOs. “In the second half of 2023, we saw early signs of recovery in the Private Equity market as several portfolio companies received valuation upticks. At the same time, we note that there is still some uncertainty in the market and our investment partners see little improvement compared to the first half of the year when it comes to the difficult fundraising and IPO environment. This differs from the situation in the Venture Capital market, as continuous headwinds during the full calendar year resulted in downward pressure on valuations remaining across the board,” Ralph Engelchore, manager of the Kempen Global Impact Pool fund, explains.

    “As an asset class, both Private Debt and Infrastructure were stable and positive throughout 2023, driven by higher interest rates (former) and increased demand for operational infrastructure projects (latter) The challenging market environment allowed the GIP to showcase a valuable feature and important theme which added to the robustness of our solution: diversification. In a year where our Venture Capital investments struggled, our investments in Private Debt and more notably Private Infrastructure provided support. Private Debt offered a safety net with its lower risk profile, and our Private infrastructure investments focusing on renewables contributed significantly to returns. Our focus is on investing in early-stage infrastructure projects that typically see a valuation uplift once a project becomes operational and starts to generate electricity. In 2023 multiple projects were completed, resulting in a nice contribution to overall returns,” Engelchore adds.

    Engelchore notes that company re-valuations contributed positively to his fund, while venture capital investments hindered performance. “During the second half of 2023, the Private Equity bucket contributed nicely to performance as many of the underlying portfolio companies received an upward valuation adjustment. Several companies were re-valued as a result of new financing rounds, ongoing exit-conversations and increased market multiples of peers. In several cases, the re-valuation was based on improved underlying fundamentals such as increased revenues or improved margins,” Engelchore says.

    “The investments in more early-stage (Venture Capital) companies detracted from performance due to both market-wide and company-specific circumstances. Despite the fact that most of the GIP companies deliver strong revenue growth and improved their margins, valuations are still under pressure across the board. The high levels of interest rates and inflation are a headwind for these high-growth companies. This makes investors more risk-averse and therefore less capital is available to finance new funding rounds, hence putting downward pressure on valuation,” Engelchore argues.

    Biodiversity, Olive Oil, Cocoa and Coffee

    On a more positive note Kempen highlighted that a rising interest in biodiversity and natural capital, a topic that has recently risen to the fore. “From a commercial perspective, we see a growing interest in increasing natural capital through the practise of regenerative agriculture. At the centre of our activities is a great emphasis on enhancing natural capital and the quality of farmland. We spend a lot of time educating investors and advisors on the potential and sustainability aspects of investing in global farmland,” Richard Jacobs, portfolio manager of the Kempen SDG Farmland fund says.

    “The impact on nature and biodiversity is an increasingly pressing issue, with numerous emerging reporting initiatives such as the TNFD coming to the fore. However, quantifying the impact on nature remains a major challenge. This has led to the proliferation of developments and technological advances in impact measurement. We have already set aside 5% of the land in our portfolio for biodiversity zones. In addition to the quantity of biodiversity, our focus this year is on the quality of biodiversity improvements. A good example of this is our innovative ‘Transforming Strategy’ approach, which enables us to turn depleted land into fertile farmland. In Australia, we have successfully transformed a piece of land that used to belong to a coal mining company into farmland. Now we are planting it sustainably, and creating habitats for native animals such as koalas. A special passageway is also being built so that the animals can cross the land safely,” Jacobs continues.

    Discussing performance, Jacobs chose to highlight the performance of olive plantations in Portugal and the expected price increases for olive oil. “A milestone for the SDG Farmland Fund in the second half of this year was the second yield from our olive plantations in Portugal. By acquiring smaller, unproductive plots from more than fifteen individual sellers, we have succeeded in cultivating high-density orchards. When we started the investment two years ago, we expected a yield of around two and a half euros per kilogramme of olive oil. However, last year’s harvest exceeded our original forecast with a selling price of four euros per kilogramme. This year, olive oil prices are expected to rise to between six and seven euros per kilogramme, as yields are lower than expected due to the shortage of sunflower oil from Ukraine, heatwaves in southern Europe and insufficient rainfall in Spain, Italy and Portugal. Despite the extremely hot and dry conditions this year, our abundant water supplies and effective irrigation methods have largely cushioned the negative effects,” Jacobs explains.

    Suhasini Singh, responsAbility

    At responsAbility, the focus was on cocoa and coffee. “In the second half of 2023, the Agriculture Fund concentrated on providing targeted financial support for critical agricultural cycles, notably for the harvest of West African cocoa, East African coffee, and Central American coffee. This approach differed from the first part of the year, which focused on supporting South American coffee and West African nuts. Our strategy also included sustained investment in multi-commodity companies throughout the APAC region, demonstrating our commitment to leveraging seasonal cycles and geographic diversity to optimize portfolio performance,” says Suhasini Singh, Head of Sustainable Food Debt at responsibility.

    “The performance can be attributed to our ability to increase portfolio yields across different markets. This was achieved by leveraging our deep market knowledge and strategic partnerships, enabling us to capitalize on opportunities in the commodities market. The fund’s focus on sectors such as cocoa and coffee, where we have significant expertise, was instrumental in driving performance and achieving our target net returns,”  Singh.


    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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