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Are the Covid Crash Deals Over?

Sun Life’s asset manager jumped on distressed opportunities in the first few months of the downturn. Now, markets “feel expensive to us.”

In the early days of the pandemic, SLC Management, the institutional investment manager of insurance company Sun Life, quickly raised money from institutional investors to launch a series of opportunistic funds to take advantage of the distress.

President Stephen Peacher put an investment team together and raised money from parent Sun Life and outside clients to invest in beaten-down REITs (real estate investment trusts). The firm also launched one of the first funds to invest in securities from the Federal Reserve’s and Treasury department’s TALF, or Term Asset-Backed Securities Loan Facility. TALF was designed to stabilize credit markets by encouraging investments in asset-backed securities with federal government loans. Peacher tapped an investment team that had managed a TALF fund during the global financial crisis. SLC won new mandates over the past few months for strategies in private credit, liability-driven investments, and commercial mortgages.

But with the swift recovery in public markets, Peacher is more cautious about the future.

“We were buyers of both credit and equities early on. Now both feel expensive to us,” said Peacher. “Our degree of conviction is a little lower.”

For one, the firm is debating value in real estate, given the uncertainty of whether people will go back to traditional offices in the same numbers. 

SLC is still providing seed money to its newest boutique, InfraRed Capital Partners, for a U.S. institutional renewables fund that will invest in wind, solar, battery storage, and other alternatives to fossil fuel. InfraRed is actively looking for assets for the fund. “That’s a sector we’re positive on,” Peacher said. SLC closed the deal for InfraRed on July 1. 

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For future acquisitions, SLC’s top priority is “below investment grade” private credit. But given the rebound in public markets, Peacher doesn’t expect that a target will come cheap or with any kind of a Covid-19 discount. He said he recently got an email from an investment banker indicating that the asset management mergers and acquisitions market is very active.

There may not be discounts, but Peacher said the structure of deals may change a bit, giving some protection to buyers if markets turn down in the next year.

SLC has been in opportunistic mode since March, but so have many of its clients. Institutional investors have moved money out of some of its core fixed income strategies to take advantage of lows in equity markets. The flow has slowed as markets have rebounded, but they haven’t yet reversed. With governments around the world doing what they can to help their economies, interest rates are at lows. “With yields having fallen so much. It’s really hard to allocate back to core fixed income right now,” he said. Future fundraising concerns him, given that bargains in many asset classes are hard to find. 

“It’s hard for institutions to make decisions in this environment,” he said.

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