Q&A with Mikko Iso-Kulmala

Q. How does the Private Debt Investor Committee define Private Debt? 

Non-bank, bilateral debt which is not syndicated and does not have public ratings.

Q. What are the biggest challenges that the Committee is working on right now?

Many different developments but one of the biggest is the traditionally institutional asset class opening more to the non-institutional investor base, especially through the semi-liquid vehicles (ELTIF/LTAF regulations).

This brings opportunities but also challenges and with the regulators still finalising aspects of the framework, the Committee is actively discussing  the ability  to balance risks and opportunities. For example, transparency around liquidity of an asset class for an investor base  used to being able to redeem with short notice is important to get right.

Also, with the non-public nature of private debt, the desire to enhance transparency for investors whilst respecting the privacy between the borrower and lender is an ongoing challenge.

Q. And how is the Committee addressing these?

By bringing the right people into the room and discussing topical matters in a safe, open environment where goals are aligned in creating a better outcome for all market participants, and then taking the right follow-up points from these conversations.

By drawing on the expertise of ELFA members and different firms we can get a more consistent picture from the GP side and  identify areas where the Committee can help bring clarity and consistency. For example, we are currently working on a project around democratisation of private debt and might organise a webinar or a best practice guide around relevant regulatory changes on this.

Q. What major changes have you seen in the market over the last few years?

Significant growth of both market size and diversification, especially at the larger end of the market financing where deals  used to  rely solely on public markets. We believe both public and private markets can and will continue to function and develop alongside one another and  at the larger end we are seeing deals move from one market to another depending on the depth and flexibility of financing.

ESG and sustainability has also become a focus with the market moving beyond the standard ‘integration’ approach  towards impact, and an ability to illustrate concrete evidence of outcome (rather than just evidencing the process itself).

Q. And how are these changes shaping the future of private debt?

Private debt has become a core asset class for investors and one of the building blocks of a diversified portfolio rather than a  niche, one-off allocation. With further geographic growth and expansion of the local direct lending markets (e.g. Asian and Australian direct lending ), we would expect it to become even more ingrained into the broader ecosystem of the future.

 Looking ahead, we also expect market participants to think of more efficient and creative ways of financing, with one potentially huge growth area being  the use of AI and other technological advances to enable more efficient and transparent access to the market as well as reporting, whether you are a lender, borrower or investor.

Potential enhanced regulation is also a big talking point, and it is important to have the right level of oversight & transparency  without overly restricting the flexibility offered by the private nature of the market.  The future for the asset class is very exciting and we expect  its expansion to continue.  

Q. What steps has the Committee taken to enhance engagement with ESG disclosure in private debt?

Liaising with market participants to understand the current challenges and how they are seeking enhanced visibility – especially for specific reporting purposes (Insurance being a good example) – and more concrete evidence of outcomes so that the Committee can identify themes and provide guidance on them to the market. There is not yet a fully standardised market approach around this, so understanding challenges while respecting the private nature of the information should allow for a more consistency and standardised approach, where appropriate. 

Our ability to deal with other ELFA Committees is a benefit, for example, drawing on the experience of the ESG Committee on ELFA ESG factsheets to standardise ESG reporting  from borrowers. Another recent example is a workshop we conducted with participation from financial consultants, drawing upon their views and experiences, and publishing a short recap.

Collaborating with borrowers to help them achieve their financial goals in a sustainable manner is where we want to see the market develop.