Future return: AlbaCore Capital offers carbon offsets for private credit
The founders of European private credit manager AlbaCore Capital Group began investing with an environmental, social and governance lens in 2010 when they managed private debt for the Canada Pension Plan Investment Board, or CPPIB, based in Toronto.
Today, AlbaCore Capital, based in London for almost 6 years, with approximately $9 billion in assets under management, continues to emphasize ESG factors in its stock selection. Late last month, the company launched a “Carbon Conscious Investment Solution” share class for investors who want to know the carbon footprint of their holdings.
“We try to provide investors with a carbon-neutral stream of return,” says David Allen, Managing Partner and Chief Investment Officer at AlbaCore Capital.
Private debt funds have boomed in recent years as sophisticated investors seek yield in an extremely low rate environment. According to the Global Private Debt Report by private market research firm Preqin, assets under management for these funds are expected to reach US$1.2 trillion by the end of 2021, up 17% from to the previous year.
AlbaCore Capital has a hybrid strategy of investing in private debt and public debt through leveraged loans, high yield government bonds, high yield private securities, second lien, preferred shares and direct investments, mainly in European companies but also in American companies. The company is said to post returns of around 16% per year.
Investors, which include sovereign wealth funds and pension funds around the world in addition to “private equity billionaires”, can invest in the company’s funds in US dollars, euros or pounds sterling.
“The two markets [private and public] at different points in time are attractive if you can switch between them,” says Allen. “I describe it as peanut butter and chocolate…[they’re] better together.”
penta recently spoke with Bill Ammons, co-founder and portfolio manager of Allen and AlbaCore Capital, about the company’s holistic approach and its longstanding consideration of environmental, social and governance, or ESG, factors .
A Canadian approach
When Allen began investing for CPPIB in 2010, after leaving Golden Tree Asset Management in New York, he says he was given the opportunity to run a loan fund the way he saw fit. But, he was told to use an ESG overlay.
At the time, Allen says he didn’t know what ESG was. What stood out to him about this approach, however, was how focusing on good ESG practices could minimize the risk of loss in a portfolio. For example, if you look at history, one factor that often played a role in corporate defaults was energy. A backdrop to the eventual bankruptcy of airline TWA in early 2001, for example, was partly driven by rising fuel prices, Allen says.
Several other companies defaulted on their debt following the first Gulf War when the price of oil crashed to below US$20 a barrel, particularly stressing price-dependent North American producers. at least US$60 per barrel. “How can you preserve capital if you have a capital investment in a North Shore oil rig or shale, and if oil goes below US$60, you lose all your money?” Allen said. “So we eliminated the energy.”
The company is also avoiding other businesses it sees as volatile, such as minerals and mining, and instead focusing on businesses in media and television, healthcare, education and technology. software technology, he says. While AlbaCore is primarily a European credit manager, it also invests in opportunities it finds in the United States.
By focusing on broader ESG issues, Allen adds, AlbaCore can often eliminate potential risks. “If your board or management is not doing well on [governance] or improve, we feel that’s a risk factor – what else aren’t they good at if they can’t handle that? ” he says.
Carbon Conscious Investing
In its annual Global Credit Report, Preqin notes that ESG factors are becoming important to credit managers, regardless of the types of debt they invest in. says the report.
In that vein, AlbaCore Capital’s carbon-conscious investment solution aims to provide transparency, detailing its companies’ carbon output and how it aims to offset it for investors who request it and are willing to pay a premium. premium for doing so.
The solution gives investors who opt for the possibility of offsetting the greenhouse gas emissions produced by one of the individual companies of an AlbaCore fund.
According to the company, the methodology it uses to track the emissions of its portfolio companies reflects the carbon footprint for all scenarios, even when public data is not available. The company will update investors on the carbon footprint of the entire portfolio and individual companies on a quarterly basis, with published results being verified by a third party. In some cases, portfolio companies may have a negative carbon footprint that can be used to offset others.
To offset carbon, AlbaCore buys offsets with the help of UK company Abable, which in turn will provide investors with details of how offsets are made and verified.
The cost equation for investors considering carbon offsets is similar to what they already do when assessing the risk of loss from any investment, Allen says. In this case, investors are simply adjusting to carbon. A bond issued by a carbon-free company yielding 7.5%, for example, may be worth more than a security issued by a shale producer yielding 7.9% if it costs 2% per year to offset carbon, Allen said.