Private Markets 360° | Episode 48 (Video): Unpacking the State of the Market (With David Hedalen, Head of Private Markets Strategy & Research at Aviva Investors)

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00:00:04:06 - 00:00:24:21

Jocelyn

Hello, and welcome to Private Markets 360°, your insider's guide to the world of private markets. I'm Jocelyn Lewis. And today, I'm joined by my co-host, Chris Sparenberg, and our guest, David Hedalen, Head of Research and Strategy at Aviva Investors. David, thank you so much for joining us. How are you today?

 

00:00:25:11 - 00:00:28:08

David

Very well. Thanks, Jocelyn. Chris, thank you for having me.

 

00:00:28:08 - 00:00:42:18

Jocelyn

Yes. Thanks for coming in. So David, we'd like to start off with you giving a little information bit about your background, your current role, and we want to hear how your team approaches research in this vast world of private markets.

 

00:00:42:18 - 00:01:12:03

David

Sure. Yes, happy to start at the beginning, if you want a little trip down memory lane, if you want to Jocelyn. But yes, so I grew up on the West Coast of Canada. I did my undergrad there as well. And then after a bit of traveling I moved to London, started working in financial services at that point, not in private market specifically, and then actually went back to university to do a Master's in a sort of property-related degree. And then got hired at a company called IPD (Investment Property Databank), which was laterally acquired by MSCI Real Assets.

 

00:01:12:03 - 00:01:38:22

David

So I spent 4 years at IPD, and this was really diagnosing real estate portfolios, private real estate portfolios, aggregating data, establishing valuation approaches or examining those, I should say, as well as methodologies around performance diagnostics. So I spent 4 years there from 2006 to 2010, so right in the jaws of the financial crisis. So fair to say I learned a lot there.

 

00:01:38:23 - 00:01:57:11

David

Maybe we could touch on some of the lessons learned a little bit later. And then laterally, I was brought internally by Standard Life Investments, so a large U.K. investment manager that was in 2010. And then about 3.5 years ago, I moved to Aviva Investors, where I am today to head up their private markets strategy and research function.

 

00:01:57:12 - 00:02:22:09

David

And really, the goal of that team is a holistic private market research function. And the business covers a number of areas, but really the primary research functions for my team are infrastructure, real estate, both debt and equity. So we're large investors, both on the equity and debt side as well as private corporate debt, structured finance and actually venture capital and natural capital as well.

 

00:02:22:09 - 00:02:41:22

David

So it runs the whole spectrum of private markets. And really, the way that we approach things is at least my brief from the CIO when I joined was really establish the team as sort of consistent top-down view to private markets across the franchise. So I'm not sure how familiar people are with Aviva and Aviva Investors more broadly,

 

00:02:41:22 - 00:03:10:07

David

but Aviva as a function is one of the U.K.'s largest insurance companies. And Aviva Investors is their investment manager that they use for investing some of the -- or a lot of their capital. And if you think about the numbers, Aviva Investors is $350 billion of assets under management dollars total, of which about $128 billion -- around $130 billion is fixed income and $130 is around multi-asset.

 

00:03:10:09 - 00:03:24:04

David

There's another slice of equity and around $63 billion is private markets. So it gives you a feel for how big the private market franchise is at Aviva Investors. And I should just clarify, most of that is within Europe.

 

00:03:24:06 - 00:03:27:23

Jocelyn

Is that an area of growth for you, too, private markets?

 

00:03:28:00 - 00:03:57:24

David

Absolutely. And we've seen a lot of growth there. I think, Jocelyn, from the perspective of how private markets is sort of plugging into the wider investment ecosystem. From my point of view, and Aviva Investors is, again, a large U.K. insurer is also one of the largest DC providers in the U.K. So we're seeing material growth in the DC channels and the allocations to private markets through those DC solutions for investors.

 

00:03:58:00 - 00:04:18:00

David

And I think this is an interesting dynamic for private markets - probably something we'll explore later - is how do we get private to talk to public so that these allocations work because despite a lot of the default funds, at least that Aviva Investors runs anywhere from 10% to 25%, in fact, some of the funds are private,

 

00:04:18:01 - 00:04:29:12

David

it's still a minority or at least a relatively small share of that overall allocation. So it's really important that private can talk to public in that sense.

 

00:04:29:14 - 00:04:46:18

Chris

So private talking to public and then also being focused very much on Europe, you're seeing multiple jurisdictions. I'm sure you're taking in a lot of information about different market dynamics. How does that inform the research that you're doing, the way you think about structuring -- just what perspectives does it give you overall?

 

00:04:46:18 - 00:05:07:20

David

Yes. That's a good question, Chris. So I think when we think about how we use research in a way or the data that comes through from the private market ecosystem, and let's call it the shop floor, if you will, in terms of our business. So as I mentioned, we run these large areas of private markets across Europe in real estate, both debt and equity, et cetera, infrastructure as well.

 

00:05:07:22 - 00:05:27:13

David

We get a lot of sort of real-time intel coming through. And we do use that. We also are able to buy in third-party data. So we do sort of augment the third-party data provision with our own intel. And then from there, the team is tasked with sort of building up the sort of proprietary tools that we would use to help make better investment decisions and help inform.

 

00:05:27:14 - 00:05:49:23

David

And I think I should probably clarify as well, Chris. The research, the top-down views and for those listeners who are in the weeds of private markets, they know that a top-down view is probably more applicable in the public space than it is the private space, right? So we may have a view on a certain market, but actually, the application is harder in the private space because of access routes, constraints, liquidity

 

00:05:49:23 - 00:06:09:20

David

you might have to develop out an asset that brings in its own type of risk, et cetera. So really, whilst we offer that top-down view, there is that sort of, let's call that, the theory of where we think the markets are going. But the reality is the actual implementation of the investment, there's a journey in there, which my team supports the business on in terms of how we do that. But it's not a one-for-one.

 

00:06:09:21 - 00:06:26:21

David

The views from my team are not necessarily dogmatic in a sense because the application will be very, very challenging to do because we may like a certain sector that there may be no product available, for example, right? But either way, having that top-down view is critical when we think about how we look at the various types of private markets.

 

00:06:26:21 - 00:06:44:18

David

So third-party data is bought in. We use that -- we use our own sort of intel from the shop for that operational leverage to really refine and reinforce and come out with what we think is better options and for our investor base.

 

00:06:44:20 - 00:07:22:11

Jocelyn

And then thinking about those different options and solutions that you have across the investor base. So Aviva is mainly investing in Europe. But when you think about Europe and private markets, that's all different geographies really because you have all these different European countries so -- or European jurisdictions. So how do you bring that into your research? And what unique insights are you then able to get from taking in all of that data and research to then say, here's how we're going to structure our outcomes.

 

00:07:22:11 - 00:07:44:03

David

Yes. No, again, this is, I guess, in a way, the advantage of Europe and that some of the -- there's some barriers to certain countries for tax reasons, et cetera, depending on where you're domiciled, Justin. So absolutely, there are considerations there. And that probably relates back to my previous point that we may like a certain country or a certain sector, but actually -- it may not be tax beneficial depending on the jurisdiction where the fund is domiciled,

 

00:07:44:03 - 00:08:06:13

David

right? And so that's another layer, I think, that a lot of investors have to consider in Europe. So if you think about how we would break that down, we would look at the country risk. And so we're supported by a wider macro strategy team that sort of look at the various -- have views on country dynamics, cyclicality of countries, GDP growth per country. So

 

00:08:06:13 - 00:08:33:00

David

we have a view on the sort of top down. We take that view and then think about, okay, how does that impact, let's say, the built environment in the real estate case or the demand for energy in certain countries or from a lending perspective, spreads, et cetera, in various markets, clearly, liquidity is a consideration there. And that sort of cooks down to your sort of, I guess, in a way, Jocelyn, on your risk premium per country and how we think about that. And how we do that and how we navigate that is through what we call relative value.

 

00:08:33:00 - 00:09:02:11

David

So we look at everything through a relative value lens. In order to get there, it is not very straightforward in private markets because as you both know, sometimes the data is not available to be able to base anything off. So you almost have to manufacture that. So we will pull in this data for various markets, and we'll have visibility because we have visibility from deal flow, either maybe deals we didn't win, but we have evidence of where we outbid, potentially bids we did win, and we know potentially exact underbidder number,

 

00:09:02:11 - 00:09:19:04

David

but we may have a feel for how many underbidders there were and is there a lot of demand for this type. And clearly, we're sellers as well. So we know what market is pricing when we sell. So we can sort of triangulate all that data, and that is proprietary, right? That is the sort of informational advantage, I would say, in this market.

 

00:09:19:04 - 00:09:37:18

David

And what we do then is we put that into a relative value framework to be able to establish, okay, where are we seeing the best value today on a risk-adjusted basis? Now that's not for everyone because that's a coefficient, that's a ratio. And clearly, if the absolute return of that doesn't meet the hurdle, then the investor doesn't care.

 

00:09:37:19 - 00:09:57:13

David

We may have a good risk-adjusted return, but the absolute return doesn't hit the hurdle, it's not a viable investment. But this is where I think private markets -- and back to the point that you mentioned, Chris, in terms of that public-private dynamic, this is where private markets, I think, really needs better data,

 

00:09:57:13 - 00:10:25:05

David

and we're getting there. And I joined the industry 20 years ago, working for what was a data provider, hoovering up valuation data on private assets, putting that into a sort of confidential mixer and out came an index for New York offices or out came an index for the London City, whatever it might be. And what that gave investors was a sort of basis to be able to establish some sort of reference point, right?

 

00:10:25:06 - 00:10:49:08

David

And that gave people that are looking to model that out, okay, here's the relationship with different drivers in the macro economy, right? Here's the relationship of this asset class versus this asset class. Now that's real estate, right? That's alongside sort of core private equity, that's probably the most invested part of the private market stack, right? And we can see that from our own survey data,

 

00:10:49:08 - 00:11:06:10

David

and that's not a surprise to anybody. So it's quite mature in the private market sense. It's often the first investment people in private markets is real estate makes sense. But what the index gave investors was the ability to then start to model out a basis and a framework to think about how they do it.

 

00:11:06:11 - 00:11:22:20

David

To your point, Jocelyn, on data where maybe there isn't a reference point in a European market that's maybe more developing, more nascent or the transparency is not there, it is hard. So we have to think about ways that we can do that without necessarily having some sort of reference point to base

 

00:11:22:22 - 00:11:36:23

Jocelyn

Chris, does it make sense to talk a little bit about our new data set? And since we have real assets and private credit as the first 2 segments that are available within that data set it might be helpful.

 

00:11:37:04 - 00:11:54:12

Chris

I think it does, and this is a topic that's near and dear to my heart. especially, but I want to frame it almost as the complement to what you're describing is all the proprietary data that you collect. There's everything happening on the shop floor. There's the deal pipeline, you're on both sides of it, you're buying and selling.

 

00:11:54:13 - 00:12:17:20

Chris

Then there's this layer of market data that you need. Some of that comes from public sources. Other sources, I think, are newly developing. And so what we've done with our partnership with Cambridge Associates and Mercer is really to take a look at the institutional reported universe almost, right? So funds reporting into LPs and what signals you can draw from a data set like that in aggregate.

 

00:12:17:21 - 00:12:34:16

Chris

So we did start in March, we released our credit and real assets data product. For us, real assets is everything you described, it's real estate infrastructure, nat res. But can you talk about the importance of market data and where you see maybe some inefficiencies or opportunities and what role that would play in your process?

 

00:12:34:16 - 00:13:05:21

David

Yes. So this is a live conversation. We're always looking for more data. So obviously, when I heard about the project, Chris, that was coming out and obviously spoken to you about it as well, really, really interested to see what data was coming out and how it could be used. And I think the use case for us, right, is, as I mentioned to Jocelyn's question, this idea that we can look at post returns for any type of private asset historically and give the journey,

 

00:13:05:21 - 00:13:30:17

David

the volatility of the journey is really critical, particularly looking back to the point on DC and public investors, that's the language that they speak. They're used to seeing NAV volatility, valuation volatility. They're not used to seeing a 5-year IRR projection. That's one number, right? And that's a really important distinction. So I'll paint this with a live example about how we've done it,

 

00:13:30:17 - 00:13:52:01

David

and this hopefully will get to your point, Chris. Historically, where we didn't have a reference point for a market data series, a nascent infrastructure asset class, something, let's say, EV charging, right? Now your data set may have a series for EV charging, but even if it did, it's probably not historic enough to be able to sort of hang your hat on,

 

00:13:52:03 - 00:14:12:09

David

Sure.

 So what we did as a business, and this is our original relative value framework was basically say, okay, well, we're doing these deals. We've got the models, we've got the cash flows. Let's hand them over to some quants on the research team to basically stress those models and give you a sort of stochastic projection of your IRR permutation.

 

00:14:12:09 - 00:14:31:12

David

So 5,000 IRR scenarios versus various. So you have a base case and then you have a stress and then you end up a situation, okay, what's your level of confidence in your central IRR because you now have the potential distribution, right? Now that's great. That's an IRR that gives you a risk-adjusted -- sorry, it's not risk-adjusted as we think in terms of the volatility over the return.

 

00:14:31:12 - 00:14:37:01

David

It's actually risk-adjusted in terms of your -- probably your predictability of hitting your central case.

 

 

 

00:14:37:01 - 00:14:39:05

Chris

Distribution

 

00:14:39:07 - 00:14:53:24

David

So that's fine. And that actually worked. For a long time, that worked. And it was prior to my time in the business, but it was one of the first things I was asked to do is look at this model, and it did work, and it was great. It was very clunky because you had to then take a new deal.

 

00:14:53:24 - 00:15:10:01

David

And if you didn't have a deal, we are a big player in the European private market space. But if it was a new asset class you hadn't done an underwrite on, guess what, you have to build that. You're not going through that level of detail necessarily because nothing sharpens the mind like a live deal, right?

 

 

 

00:15:10:03 - 00:15:27:22

David

We all know that.

 

 So fundamentally, we were using these deals where we've done a material amount of DD and be able to stress it. And this was -- the problem is this was effectively a country-specific EV charging program, right? It wasn't a sort of wider context of how is this working? Whether it's a nascent sector like battery storage

 

00:15:27:22 - 00:15:47:13

David

now, again, new, very popular and a lot of investors looking at that sector. These are things that are challenging to do. So you had this situation where we had this really interesting output, IRR-based outcomes across all these different sectors, and you could do it for real estate as well, clearly, right? We knew that. You had to make some assumptions on correlations and how,

 

00:15:47:16 - 00:16:20:04

David

but you could start to run various outputs and sort of say, how does this work and then assess, okay, where is the best risk-adjusted return here for this ecosystem of private markets. The problem is the DC, the public side would say, how can this talk to my book, which is using some sort of post modeled out volatility of the future and the past, and we know the max drawdown and we know the potential banana skins or what will react if there's a macro event. That doesn't give you that.

 

00:16:20:04 - 00:16:42:05

David

That's basically one number. So weaving that in was challenging. So we've started to augment that now and using where we can, to your point, Chris, this data. So where there's viable data sources that have history, you can actually do things very similar to what they do in public now, where you're actually modeling very, very similar total return forecast with similar types of volatility metrics.

 

00:16:42:05 - 00:17:05:20

David

You can de-smooth the series and you're actually having for a public market CIO - and let's be frank, most CIOs in investment firms cut their teeth in the public sector -- public sector, the public side, excuse me, right? And so this sort of IRR conversation is often a challenge sometimes. So when you can then say, well, this is now on the same metrics on the same basis.

 

00:17:05:20 - 00:17:24:04

David

So where you have to your data set, where you have that ability to sort of say, okay, this is a long enough series, a deep enough series, even if it's not as robust as you would like, you can still start to use it as a base, that's extremely helpful to start to think about how you potentially look at some of the factors influencing that asset class,

 

00:17:24:04 - 00:17:44:21

David

how sensitive are the various market dynamics to rates, GDP growth, whatever energy, whatever it is you're looking at. And I think where the market is going is very much down that route, at least from my perspective. And look, I'm speaking from a major DC player, private market investor. We don't run a lot of closed-end vehicles.

 

00:17:44:21 - 00:18:05:02

David

We don't run a lot of sort of 7-year life vehicles. We're mainly open-ended funds, LTAFs, evergreen structures for DC solutions. So this is sort of the lens that I look at it through. But I can tell you now, we've got people on my team who solely look at getting that private market output to talk to public, so it can be modeled.

 

00:18:05:02 - 00:18:25:19

David

So strategic asset allocation makes sense. And that's, I think, to the point, Jocelyn, is what's happening there is how it's used and how the data is used in public -- private is coming to public to a degree, Chris. So the more of these lines you can get, which show the sort of ex post returns and

 

00:18:25:19 - 00:18:43:20

David

Even if it's investors questioning the depth of the data, it's still better than nothing. We're at the moment, for a nascent sector, one that we don't have data for, we're having to effectively create it for nothing. We're here, you at least have a basis to be able to sort of reference that to a degree.

 

 

 

00:18:43:22 - 00:19:01:20

Chris

It's incredibly interesting. I think this is definitely an area where we'll see a lot more developing. For us, the goal is always to capture the total market. And that's not just from a data or performance metric standpoint, but then also how granularly we can detail the assets themselves, the sectors that we're covering, hopefully, to give you more and more of those inputs.

 

00:19:01:20 - 00:19:25:17

David

And I think that's the next evolution, I would say, right? So this is now -- if you think about – you are flying the flag for private markets, you say, okay, so now you're starting to model out against public. It's a total return methodology. It's not a sort of specific private market IRR or any type of private market-only equation that's used.

 

00:19:25:18 - 00:19:40:15

David

I don't think those will go away. But in order for people sort of understand and be able to do proper SAA, they need to be consistent, right? And yes, there's -- you need to look at these. And as I said, this isn't dogmatic. This is not something that we say this is the outcome, this is the SAA.

 

00:19:40:15 - 00:19:54:02

David

It's more this is your sort of a skeleton of how we would view it based on the data. And then you start to put the meat on the bones of this thing and say, okay, there's lateral movement from the asset allocator, there's lateral movement from the fund manager to do what you want. But fundamentally, this didn't exist before

 

00:19:54:03 - 00:20:26:17

David

and now starting to come to fruition. But if that's the sort of input, right, the other side of it is, to your point, Chris, on the output and starting to assess performance, right? And this is where I really think -- and when I spent 4 years at IPD, I was presenting to clients. So IPD, again, this sort of index provider that was hovering up private data on behalf of private investors. It wasn't a forecasting shop. It was a consultancy service that basically diagnosed performance.

 

00:20:26:21 - 00:20:51:08

David

So it was very much backward looking. But I probably did up to maybe 100 presentations a year on portfolios. And you're sitting down with investors through the good times in '06, through wobbly times in '07, the bad times in '08 and then out the other side, right? And you see -- you learn a lot. And there's a lot of behaviors that you saw that -- and lessons learned from that experience.

 

00:20:51:10 - 00:21:18:01

David

And a big one was around performance and investors moving or having some sort of viable reference that they could show that they were good managers. So even though -- I mean, we're in London today, that market took a 40% drawdown during the financial crisis from a capital value point of view, there were some investors out there that probably lost money because of higher quality product, better underwriting on their tenants, better

 

00:21:18:01 - 00:21:37:08

David

location, whatever it might have been, the factors that influence that haircut on their values to not be as severe. -- they want to show investors that actually they were good. So yes, it was bad, but they were much better off than the market average. Now that's 40% average for the index. There were some actually that it's around that 40%, right,

 

00:21:37:09 - 00:22:00:05

David

which wasn't pretty. And it was difficult for investors to -- and fund managers to handle and explain. But having viable data to do that and reliable data to show that is critical, right? And I think when you get into the realms of public as well, then you start to get into things around attribution. So not just absolute returns and thinking, okay, well, the market did minus 40% on the capital, but we

 

00:22:00:11 - 00:22:22:06

David

did minus 20. It's okay, well, where and why? And how is that important, right? And as private markets becomes more sophisticated, right, as more capital flows into this, not just from the traditional institutional channels, but also from DC, which is a huge growth channel globally, but also retail channels as well, wealth advisory, massive opportunity for the private market space.

 

00:22:22:12 - 00:22:44:17

David

they are used to seeing diagnosis of performance, not just, well, here I am, here's a number, and I beat this number. It's actually, well, why did you do that? And actually, how is your risk control working? So the better data you have, whether it's in the private credit space or in the credit space or the equity space and the ability to slice and dice that and diagnose that is absolute absolutely critical.

 

00:22:44:17 - 00:23:10:14

David

And we see it now. We see it now where you can do that and say, okay, well, the reason we did well here is because we weren't invested in this market or the reason we did well is because we're overweight in this market. It's very, very powerful, not just for getting people up to speed with private markets and how it operates, but also from a manager fundraising point of view in terms of saying I see we're pretty good at this and we make the right call, whether that's a thematic call, whether that's a cyclical call or something...

 

00:23:10:14 - 00:23:12:04

Chris

Can explain what we do and what we don't do.

 

 

 

00:23:12:09 - 00:23:12:12

David

Exactly

 

00:23:12:12 - 00:23:13:14

Chris

as well with evidence. --

 

00:23:13:14 - 00:23:30:07

David

which is bread and butter for the public space, right? -- overweight tech, we're underweight tech, whatever it is, you can do that very easily and show should have been here. I was overweight here, this was a benefit. Private is getting there, and it will only benefit the sector as it gets more and more pronounced.

 

 

00:23:30:07 - 00:23:30:11

Jocelyn

Yes.

 

00:23:30:11 - 00:23:33:21

Jocelyn

And that track record that you have, that's another data point, too.

 

 Exactly, Jocelyn,

 

00:23:33:22 - 00:23:57:11

David

exactly. And that's, again, to the point on DC with evergreen funds, a lot of these funds favor evergreen. That track record is important, right? Because they're constantly investing into this vehicle as opposed to sort of one set of DD and then 5, 7 years later, there's potentially another fundraising...

 

00:23:57:13 - 00:24:20:21

Chris

Let's talk about investments for a minute. So in discussing Aviva, obviously, the insurance side of the business is immense, and you have a lot of insurance-based capital in your funds. You talked about a strategy of insurance-backed buy and maintain for private debt. Can you talk to us about how that expresses itself in the portfolio, how you handle portfolio construction?

 

00:24:20:23 - 00:24:24:16

Chris

Just what -- how does that inform your strategy overall?

 

00:24:24:16 - 00:24:52:01

David

Yes. So it does a number of things, Chris. We talked about this sort of intel from the shop floor. It obviously means that we're very active in the market. And so Aviva being one of the largest insurers in the U.K., absolutely, there's a lot of private debt originated on behalf of the insurance parent, absolutely. That tends to be liability driven the buy and maintain.

 

00:24:52:01 - 00:25:18:13

David

And so it tends to be investment grade. A large portion of it is asset-backed as well, so I think infrastructure and real estate. And there's also an element of senior corporate and structured funds. So the majority of the book from that slice is investment grade. Now there is a subsector to that, which is the fund space, which is a multi-sector private debt approach.

 

00:25:18:13 - 00:25:34:10

David

So in a way -- and I would say that how does the -- so the question is how does the insurance book sort of drive the strategy? I would say it helps us get visibility on the market dynamics. So we originated

 

00:25:34:11 - 00:25:55:08

David

almost $5 billion last year in U.K. and Europe on behalf of the insurance book, but in terms of our total private debt exposure, that's a pretty typical run rate for us anywhere between $4 to $5 billion -- so we're constantly in the market doing this. Where it really starts to sort of manifest itself is in the multi-sector private debt.

 

00:25:55:13 - 00:26:14:12

David

So what it's done is we've done this -- we've been working on this -- or we've been in this sector for over 40 years. And we've got a huge proprietary database that we use. And this is something that we do share snippets with the market, the illiquidity premium. We release it every quarter. But effectively, we've got over 2,000 deals.

 

00:26:14:14 - 00:26:23:10

David

We know the excess spread we would get over a commensurate public proxy, and we know that by investment banding,

 

00:26:23:12 - 00:26:58:05

David

and we also know it by duration. And so we can get a feel for how these asset classes are behaving through cycles, particularly private debt. We actually talked a lot about equity, private debt. this database really helps us think about how we approach portfolio construction from a multi-sector private debt. So back to your point on the data set that you're building out with Mercer and Cambridge, this is very much proprietary data where we can see the different spreads we're achieving across the cycle.

 

00:26:58:08 - 00:27:18:22

David

And what we can see from this is that illiquidity premium, which, I mean, goes back to our sort of university days, it's not some sort of a static variable. It's very much dynamic, and it does ebb and flow. And actually, the different characteristics of private debt have different sort of pinch points with illiquidity premium, the excess spread you receive over that public proxy.

 

00:27:18:22 - 00:27:39:23

David

So something like real estate and infrastructure, unsurprisingly is very, very sticky. So it tends to reprice quite slowly. So what tends to happen with real estate, for example, and for a 2 degree is public spreads will tighten quickly and the private space won't react. -- quick. So you end up with a sort of exaggerated or a higher illiquidity premium,

 

00:27:39:23 - 00:28:05:15

David

you can lock that in through the structure of the credit. Private corporate debt structured finance, much more dynamic, right? -- tends to move much more -- priced much more like public. That's unsurprising. The deals can be done quicker, et cetera. So that makes sense. And so actually, what you find is whilst the spread -- the average spread achievable is higher for something like a private corporate debt, the volatility of that is also elevated.

 

00:28:05:15 - 00:28:27:09

David

So back to our -- to go back to coefficient variation risk over return. But fundamentally, the ratio is predicated on a higher volatility number through that cycle or through the cycle, whereas infrastructure and real estate, whilst the long-term average is lower, it tends to not be as volatile. So it's more stable. It does move.

 

00:28:27:09 - 00:28:51:06

David

It does have with the real estate cycle for sure, or wide infrastructure inflows, et cetera, but it's not to the same degree. So this sort of big book of origination on behalf of -- it's not just Aviva insurance, it's also other third-party managers that invest with us as well because of our breadth and depth in the market. We have other insurance partners alongside us that we originate for as well.

 

00:28:51:10 - 00:29:00:02

David

But if you take a multi-sector approach to private debt, the data that we have can help us illustrate at what point is a good time to maybe go overweight to certain sectors.

 

00:29:00:02 - 00:29:18:21

David

So back to the portfolio construction piece, back to the point around private debt not being a monolith. And actually, there's a lot of moving parts under the surface, something both of you will know very well. And this is really important around portfolio construction. So this is the sophistication of the private market space, zeroed in on private debt,

 

00:29:18:22 - 00:29:25:21

David

where actually we look at, okay, we know how these spreads are going to move or expect to move, we should be focusing efforts here or there.

 

00:29:25:23 - 00:29:53:08

Jocelyn

And when you think of the private market space, because it's private, that means that it's not as transparent as the public markets, but you are bringing in all this data. You mentioned the proprietary data set that you have. What is the balance that you have of giving transparency to those who need it. So whether it's your partners that you're investing on behalf of, you mentioned external insurance companies as well.

 

00:29:53:10 - 00:30:07:06

Jocelyn

What level of transparency can you provide because that has to be somewhat of a differentiator when you're able to give comfort in the fact that you have transparency and are willing to at least provide some of it to help with explanations?

 

00:30:07:06 - 00:30:28:22

David

Yes. Great question. And I think something -- my view on this, Jocelyn, and again, 20 years in privates, working for a company in the past, at least that was their business case was confidentiality that REITs and port cos and private vehicles submitted data into a confidential pot, and I'm sure your business is the same. And --

 

00:30:28:24 - 00:30:34:14

David

I feel like the private markets focus on confidentiality is maybe a little bit overcooked.

 

00:30:34:17 - 00:30:57:09

Jocelyn

And I think it varies a little too between some groups or some investors, I think, are a little more transparent than others because going back 20 years when I was in the asset management, I sat with some of the investors and gave them transparency, but it wasn't all of them. So I think that matters as well, the relationship as you have.

 

00:30:57:10 - 00:30:59:08

Jocelyn

But correct me if you see something different.

 

00:30:59:10 - 00:31:22:10

David

I think we're in agreement there. I think where it's going is more transparency. And I think that's the way -- and that's the way that Aviva Investors definitely approach it. The fact that we release our illiquidity premium, we don't give obviously the fully behind the curve of the data, but you can look at the calendar year average for 2025 and see what the illiquidity premium was for infrastructure debt in Europe versus real estate debt in Europe,

 

00:31:22:11 - 00:31:43:06

David

right? Like nobody else is doing that. And we just felt we've got this data. rising tide lifts all boats to a degree, this helps the wider market. But clearly, we then can go to investors and say, look, we're sharing this. We've got this edge here. We've got this data. We use this, and we can show them that we use it. And the level of sophistication we can do back to the modelling point,

 

00:31:43:06 - 00:32:01:23

David

we can then run optimal portfolios, right? So we run optimal portfolios for multi-sector strategies in private debt, for example, because we've got a view of, a, where potentially spreads are trading, right? We have a view. Obviously, we know where the rate environment is going or certainly environment is going. We know where rates are today and potentially where they could go.

 

00:32:01:23 - 00:32:21:20

David

Clearly, if it's floating, that changes some of the projections going forward. But also, we also know the potential liquidity premium. So this helps us navigate that. So Jocelyn, I think what we've seen is an evolution within the market of -- there's a lot more data providers out there, for sure. There's a lot of

 

00:32:21:21 - 00:32:27:12

David

shops that are looking to have an angle with data, right?

 

00:32:27:14 - 00:32:28:04

David

 

 

00:32:28:06 - 00:32:47:10

David

a lot of it, I would say, is absent of, I think, what we're speaking to Chris about a minute ago around the sort of long history of deep data, right? So some of it will be specific niches in private markets or might be consultancy services, but there's not the sort of what we're after is the sort of big, deep data sets where we can really dig drill into it.

 

00:32:47:11 - 00:33:03:21

David

Now arguably, if we were a smaller investment house or I was a team of one, I may need that. But for a team, the depth and breadth of my team, we need probably the baseline data to be able to build off and make our -- but on the transparency point, we will pull in third-party data.

 

00:33:03:21 - 00:33:21:24

David

We buy that in from various sources. We then augment that with the bottom up or the shop floor intel that we have. We then put it through the various models that we have, and we do play that back to investors. And investors, particularly on the DC side and more sophisticated plans will ask for,

 

00:33:22:04 - 00:33:44:14

David

okay, let's see how this works. Let's see what assumptions have you made? And I think the whole thing around private markets is this education point, right? And you've got very, very clever people who are new to the sector, right? And they're asking very valid questions about how it works, and I think that's fair, right? And so I think from a private markets, we've got to help them out.

 

00:33:44:16 - 00:34:04:17

Chris

We've covered a lot of ground talking about data. There is one source of data that we haven't touched on, which I'm thrilled to here, and that is survey data. So Aviva recently released a survey of institutional investors. Would love for you to take us through some of the information you got on attitudes toward the space, expectations, just what other conclusions you drew from that.

 

00:34:04:17 - 00:34:39:07

David

Yes. No, it's a really interesting study, Chris. So our study is done every year, 500 institutional investors around the world, $6.5 trillion of AUMs. And this covers insurance, sovereign wealth, DC and DB plans. and really only focused on private markets, but we control the questions I'm involved in the survey construction, and we can ask questions that, quite frankly, I'm interested in sometimes proving points or investigating things a little bit further.

 

00:34:39:07 - 00:35:05:24

David

So main takeaway and the fact we're on this podcast today is that private markets remains in favor very much. So I think around 88% of investors across that entire $6.5 trillion are looking to either hold or increase allocations. Now that hold is running at about 12.5% is the average allocation to privates across that data set. North America is slightly higher,

 

00:35:06:00 - 00:35:33:13

David

around 14.5%. Asia Pac, slightly lower. Europe is around that 12% rate. So that's come from roughly 10% 2, 3 years ago. So again, this growth has been material for private markets. So that's probably one takeaway that private markets very much remains in the crosshairs of investor thinking around the globe. The second one, I think, was a major takeaway from the study was around actually illiquidity premium.

 

00:35:33:13 - 00:35:55:15

David

I know we've touched on this a lot, but it was really interesting that this was now the second most reason to allocate to private markets across the survey. Number one was diversification. So my thinking on this is if you think about how -- if you were new to private markets, let's say, and you didn't have necessarily a full understanding.

 

00:35:55:15 - 00:36:13:21

David

And as we talked about, it's still quite opaque. There's still areas where it is uncertain for sure, and you are going to get paid through the excess return you should achieve. But fundamentally, diversification is the #1 reason investors look at private markets. That intuitively makes sense, right? Some of these sectors are less linked to the business cycle.

 

00:36:13:21 - 00:36:33:05

David

Some of them have different demand drivers and supply considerations than other asset classes for sure. So that kind of intuitively makes sense, I don't know if anyone needs data to prove that necessarily. It's helpful when it's there and the data is getting better. But I think intuitive, you could probably get there. illiquidity premium, this was #10 3 or 4 years ago,

 

00:36:33:06 - 00:36:52:09

David

and now it's #2. So it's really shot up the ranking. And my view, and I was speaking to my team about this as well, the sort of consensus was that the data is just getting better, that although they're not nailing the illiquidity premium to a sort of third decimal place, they're starting to see with better data, the relationship with public,

 

00:36:52:10 - 00:37:10:16

David

they're starting to see more ability to start to unpick that and triangulate that using different data sources. So part of this will just be there's more assets in the market. There's more people looking at this. Therefore, naturally, people start to say, okay, how can I sort of measure this, right? That makes sense. But secondly, combine that with more data.

 

00:37:10:17 - 00:37:29:01

David

So it's more eyeballs and more data means actually people get more comfortable with this illiquidity is there. And therefore, it's become the second most reason to allocate. So that was probably the second big takeaway from the study. The third one was the rise of evergreen funds.

 

00:37:29:01 - 00:37:35:07

David

Evergreen funds, a large majority saw the rise of Evergreen funds is here to stay.

 

00:37:35:09 - 00:38:09:24

David

So this is quite a shift in terms of how investors have been thinking about private markets access historically and the rise of Evergreen was something that was really, really clear in the survey. And I think that makes sense, right? I think when you think about what Evergreens offer, and we talked about DC solutions, but also just wider investment committees having to do a renewed round of due diligence or bring new things to market or you've got a seed fund ready to go that you can invest in on a regular basis and potentially arguably at some point when a DC is going to wind down, redeem,

 

00:38:10:05 - 00:38:36:14

David

right? So this is -- there's a natural sort of partnership there in our view with that DC and that evergreen structure. And that was clear in the survey that DC investors were clearly looking at that Evergreen as an access here to stay for private. I think some parts of the private markets landscape maybe don't lend themselves so well to evergreen.

 

00:38:36:16 - 00:38:55:00

David

If you think about maybe something like real estate development, which is much more buy it, fix it, potentially sell it, back to the journey of the NAV and what investors want out of that, that lends itself more towards, in my view, an IRR type structure where you're thinking about, okay, what's my return on capital in 7 years, let's say, or 5 years,

 

00:38:55:01 - 00:39:14:23

David

whereas a sort of more core stabilized product, you can see the rationale for Evergreen, where investors are looking at what's the NAV volatility of this vehicle on a quarterly basis, whatever it might be and how does that relationship work with the rest of my market book. So those are probably the illiquidity premium, the evergreen structure is the other one.

 

00:39:14:23 - 00:39:38:00

David

And then actually, the rise of infra. The rise of infra equity was probably another big takeaway from the study. That was the #1 destination for capital across the board and for equity in particular. And again, this was done -- the survey was probably done in November, December, results come sort of come out in February, March time,

 

00:39:38:00 - 00:39:59:08

David

and here we are in May speaking about it. And infrastructure is a really interesting one. This one, I think, has evolved in investor mindsets as well and what it can deliver. And I think through the hiking cycle, I think infrastructure really proved its sort of defensive characteristics, right? You think about the reasons why the hiking cycle was triggered.

 

00:39:59:09 - 00:40:20:04

David

There was coming out of COVID, there was a demand shock, there was a surplus demand that opened up. There was a big impulse on demand, but also energy shocks from -- particularly in Europe, I'm the European lens, there was the war in Ukraine sort of putting a choke point on energy from Russia. So that caused a material energy spike.

 

00:40:20:04 - 00:40:39:24

David

But if you think about the reasons why infra held up well was actually a lot of the cash flows either have some sort of implicit inflation linkage or explicit inflation linkage or they're linked to energy, they're energy producers, right? And so despite rising discount rates for infra, that was offset by the other side of the discount rate equation, which is cash flows.

 

00:40:39:24 - 00:40:59:10

David

So infra, and we can see this through data back to the data point, we're starting to get better data on infrastructure equity. And we can see that relative to another equity class, a hard asset like real estate, infrastructure held up much, much better from that sort of less correlation to that sort of real re-rating that experience. So that's the other big one,

 

00:40:59:10 - 00:41:18:10

David

I would say that infrastructure has been there. And if you look at allocations more broadly for investors, you could argue that infrastructure underweight infrastructure. And so whether this is also a part of the catch-up that real estate and PE have been sort of dominant homes for -- outside of private credit in the equity space has been mainly private equity and real estate equity,

 

00:41:18:12 - 00:41:24:09

David

there's clearly space emerging now for infrastructure equity as well.

 

00:41:24:09 - 00:41:44:23

Jocelyn

Yes. And then it goes back to that kind of rebalancing question, too, because you think of private markets and it's like we are in the private markets, do you want to invest? And there's so many options. So how do you choose the right one based again on the strategy that you're seeking or the returns that you're looking to achieve?

 

00:41:45:00 - 00:42:12:13

Jocelyn

David, another thing I'm curious about, too, is when investors want to get into private markets or they want to expand their footprint, there's operational challenges that are associated with that. So when you're speaking with investors, what types of questions are you getting about some of the challenges that they're facing with getting into private markets and being able to support that operationally?

 

 Yes.

 

00:42:12:15 - 00:42:40:07

David

It's a good question, Jocelyn. I think -- I would say, actually, you probably hinted at it with your question actually is to me, the big one is a lot -- the private markets is not sort of a single entity. So I would say if there's one barrier, it's education and knowledge. And as I mentioned, there's some very clever people here who are looking at the sector for the first time, and they're asking very valid questions around how does this work,

 

00:42:40:08 - 00:43:04:01

David

right? And that's totally acceptable. But I think in terms of more momentum for private asset class as an entity, whether that's any component underneath, there's an education here. So you're right, people do look at private markets as a monolith, right? They'll say, okay, this is -- but it's -- you can't allocate to private markets, right? And even as you peel the onion further, you can allocate to German real estate,

 

00:43:04:02 - 00:43:19:21

David

right? And further and then you get down to a single asset in Berlin, right? So that's, I think, really, really interesting when you start to do that education. So from an operational point of view, and as we start this journey with a lot of investors that we have and a lot of investors that we're speaking to, -- it is about, okay, let's break this down.

 

00:43:19:21 - 00:43:40:01

David

And the best way to do that and the language that they speak is data, right? It comes back to showing the classic example I often point to, Jocelyn, is let's just put up a scatter plot of risk and return on a 10-year basis, right, for the various public equity -- public equity sectors or indices around the world.

 

00:43:40:03 - 00:44:00:10

David

And your private counterpart is -- has some challenge or there's no dot because there's no data, right? And so slowly, over time, we're starting to get to ways where we can des-smooth. We go to understand the limitations of some of the valuation approaches and the smoothing nature that comes with it. And you're starting to put those dots onto that scatter plot.

 

00:44:00:10 - 00:44:25:14

David

And that is so beneficial when you sit down with investors and say, right, this is the landscape we're talking about here. And then it comes back, okay, what do you want? And actually, I think what private markets can really offer investors is solutions, right? So we talked about the liability piece. earlier, Chris, that is effectively a solution that private markets can offer investors, whether that's floating rate income, whether that's fixed,

 

00:44:25:15 - 00:44:41:22

David

right? Again, different investors want different things, whether that's long duration, short duration. You can bespoke this and you can originate based on that basis, right? And if you want that value add, then you go down the equity space looking for that sort of -- maybe it's a real estate development, maybe it's some buildup from an infrastructure point of view, whatever it might be.

 

00:44:41:23 - 00:45:04:19

David

But yes, operations, I think that's probably the main bit. I think particularly for Europe, the regulator, and I don't want to get too into the weeds of sort of jurisdictional differences. I think we've been pretty good about speaking more broadly across the globe here. But there has been sort of jurisdictional implementation of private market asset classes through the LTAF, long-term asset funds and the LTIF, which is the European equivalent.

 

00:45:04:22 - 00:45:28:17

David

These are effectively structure is designed to hold private market asset classes that can be held by various institutions slightly easier, for example. And there's very clear liquidity requirements. So they're evergreen in a sense, but there's rules around redemption notices, which are very, very clear. And that structure means that they're authorized, which means it's helpful from at least some operational point of view.

 

00:45:28:17 - 00:45:47:12

David

But fundamentally, the valuations are different, Jocelyn. So when you think about any private market, so valuing infra deal will be different to a real estate deal, which would be different to any sort of private credit deal, right? So there's different valuation approaches. So again, private markets value the same way, right? It's not done on the same basis.

 

00:45:47:12 - 00:46:07:05

David

So this again poses a chance. So it is an education. It's an education. But I think to me, the story will sell itself when investors can see what it can bring, the diversification that it can bring and also depending on what they want, whether that's the return spectrum or the liability spectrum or somewhere in between, private markets can deliver that.

 

00:46:07:07 - 00:46:17:17

Jocelyn

And with private markets being so vast, too, and you probably touched on some of it, but why the popularity with the evergreen funds?

 

00:46:17:19 - 00:46:47:17

David

So I touched on it briefly, yes, with the DC channels. But I just feel that from the perspective of investors with continual flow, whether that's DC or other providers, the fact that there's continual investment opportunity rather than a big tranche upfront and then potentially not seeing that for a period of time. Now that's fine. Often the returns are what the investor wanted, but you're also getting a lot of capital back at the end.

 

00:46:47:19 - 00:47:05:04

David

right, and then you have to find a home for that again. And that's not efficient. And I think given that the access routes are there and given the structures are in place, the evergreen funds are becoming more and more favorable because of that ability to arguably come in and come out. Now to be candid, there's challenges around that.

 

00:47:05:04 - 00:47:26:06

David

There's got to be very, very clear guidelines on liquidity constraints and how money is -- how capital is brought in and out of the funds. But selection of the right manager and the right vehicle and the right sort of requirements around those vehicles as long as investors are clear right going in, I think private markets can thread that needle.

 

00:47:26:08 - 00:47:35:16

Chris

I'd like to circle back on infrastructure for a moment. I'm old enough to remember when data centers were a real estate play and infrastructure was roads and bridges...

 

00:47:35:16 - 00:47:38:09

David

Right?

 

 

00:47:38:11 - 00:47:47:18

Chris

The market has evolved so much since then, there are so many different flavors. Can you give us a sense of how you define infrastructure and how you have that conversation with investors and even with your own research team?

 

00:47:47:20 - 00:48:08:19

David

Yes. So interesting, it relates to Jocelyn's question earlier around private markets. I guess we would view it as a does it -- is it a solution for an investor? Is it giving the investor what they want? So there is a blurred line here for sure. And the line -- the Venn diagram of real estate and infra is very much sort of increasingly overlapping.

 

00:48:08:20 - 00:48:26:00

David

You touched on data centers there. We differentiate in the team. So I -- there is a sort of, let's call it, a primary researcher focusing on infra that sort of -- and that team is doing the sort of deep dive into the infra sectors. But we also have a primary research team doing real estate, right? Now

 

00:48:26:02 - 00:48:42:03

David

they talk to each other. They're both reporting to me, so I have visibility on what's happening. But it's probably more of a matrix structure, Chris. I think from an org chart, it kind of looks like a tree, but actually it's much more of a matrix and the teams are very much alive to this overlap and what characteristics it brings.

 

00:48:42:03 - 00:48:45:00

David

But I think it is really interesting how

 

00:48:45:02 - 00:48:58:18

David

Asset classes that were historically viewed as real estate are morphing into infrastructure. You touched on data centers. I worked on real estate funds 10 years ago that had data centers in there, and that was firmly considered a real estate asset.

 

00:48:58:19 - 00:49:27:02

David

I think what's changed is the critical nature. There's a couple of things that have changed. One is the critical nature of data centers now and just how they're seen as more systemic and sort of economically material to the wider economy. I also think infrastructure, the roads, the bridges, the utilities, those were ring-fenced, high barriers to entry, inelastic demand, contractual cash flows, all the things that classic Infrastructure 1.0.

 

00:49:27:03 - 00:49:56:15

David

But if you want to call it infrastructure 2.0 is much more around digital, around, yes, they need pricing power for sure, but highly predictable cash flows are also in the mix now, not just contractual, something that's highly predictable. And clearly, some of these asset classes that were there are moving towards that sort of infrastructure like characteristic. I think data centers is one, given how systemically important these are becoming or are in society.

 

00:49:56:17 - 00:50:21:22

David

Another smaller example that maybe, I guess, for listeners kind of brings it home to life, maybe not such a behemoth as data centers is cold storage. right? So again, cold storage was viewed historically as a sort of real estate and arguably some sort of logistics, cold logistics, right, a cold logistics storage where a van would pick up anything required deep freezing or frozen product and move from place to place

 

00:50:21:22 - 00:50:46:13

David

now. That has evolved very much to something and COVID kind of turbocharges because of the need for super cool vaccines. If you remember, the vaccine requirement had some of the vaccines needed to be extremely cold, and this became sort of mission-critical real estate. And as soon as that starts to happen, it then moves into infrastructure like these are supply chain critical. They're used for food and they're used for pharmaceuticals.

 

00:50:46:13 - 00:51:12:20

David

And right away, they start to sort of come into the sort of crossover space said, okay, well, hang on, it's a building. It's got a lease, but the barriers to entry are high, the power requirements, again, this is becoming a sort of moat in itself is that if you have the power connection, whether it's a data center or something like cold storage, that's a really interesting dynamic now, which is creating its own moat that the power plug-in is critical for these things, and that creates its own defensive characteristic as well.

 

00:51:12:20 - 00:51:40:09

David

So yes, the Venn diagram is overlapping. But I think when it comes back to the investor lens and saying, okay, well, how does this satisfy the investor requirement, right? And things like are probably where we would look at both across the business is things like potentially social housing, right? They're residential housing, potentially subsidized by a government, let's say, or have some sort of contractual cash flow in there to some local government or municipal entity,

 

00:51:40:10 - 00:51:58:15

David

let's say, for example, their real estate, people live in them, it's a residential property, but the cash flows could be seen maybe as a little more infra-like, right? And so the crossover there, I think you could see a case where potentially both the real estate team and the infrastructure team potentially would look at something like that

 

00:51:58:15 - 00:52:19:13

David

and would it satisfy their investor requirement. And from there, they would make a decision on their underwriting and the hold periods might be different. The long-term projections might be different. But fundamentally, I think the investor wins here because it's actually something new that the investor could help satisfy their goal of saving for their retirement, whatever it might be.

 I

 

00:52:19:15 - 00:52:27:07

Jocelyn

So David, could you talk also about how you're leveraging your expertise to attract external investors?

 

00:52:27:07 - 00:53:02:17

David

through the lens of sort of third-party investment, Jocelyn, that's sort of your question. The way it's leveraged is really around the fund suite that we offer. And so we've got a number of solutions for clients, depending on their risk return profile across the capital stack, where we use the large footprint we have across the business to help triangulate, iterate, develop models to sort of make those decisions to show investors our capabilities and to really leverage that in-house data.

 

00:53:02:19 - 00:53:10:13

Chris

David Hedalen, thank you so much for joining us today. And thank you to our viewers and listeners for another great episode of Private Markets 360°.