Debt Capital Markets in focus

Futuregrowth has long been recognised as one of South Africa’s leading fixed-income investors, with a reputation built on rigorous credit analysis, responsible investing and a willingness to take a stand when governance concerns emerge. Earlier this year, the asset manager made what may appear to be a subtle change, but one with broader strategic significance: its Listed Credit team was renamed to Debt Capital Markets (DCM).

According to Wafeeqah Lagerdien, Head: Debt Capital Markets at Futuregrowth, the move is about far more than a new title. It reflects the true breadth of the team’s capabilities and positions Futuregrowth more clearly within the credit landscape.

A name that better reflects reality

To understand the significance of the change, it helps to understand where debt capital markets fit within the broader investment universe. “On the higher end of the risk spectrum you have equities, which offer potentially higher returns but also greater volatility,” says Lagerdien. “At the lower end of the risk spectrum you have debt investments, where the objective is generally to preserve capital and receive payments in full and on time.”

Within this debt universe sits a wide range of opportunities, from government bonds and bank-issued debt to investment-grade credit and more complex structured and high yielding transactions.

Futuregrowth’s DCM team focuses primarily on investment-grade issuers, including large corporates, banks, state-owned entities and other institutions that raise funding via the debt capital markets. The previous name, Listed Credit, however, unintentionally narrowed the perception of the team’s mandate. “The reality is that not all debt opportunities are listed, and not all issuers are listed companies,” explains Lagerdien. “We have always had the capability to participate in private placements, bilateral agreements and off-market transactions. The name simply did not reflect the full scope of what we do.”

The shift to Debt Capital Markets therefore aligns Futuregrowth more closely with industry terminology while better communicating its investment approach to clients, banks and issuers.

A changing credit landscape

The renaming comes at a time when South Africa’s credit market is undergoing significant transformation. A decade ago, state-owned enterprises such as Eskom and Transnet were among the largest issuers in the debt market. Banks remained consistent participants, while corporates regularly raised debt to fund expansion and capital expenditure programmes.

That environment has changed considerably. Governance challenges at several state-owned entities reduced their participation in public debt markets, while subdued economic growth meant fewer corporates needed to raise debt for expansion

“The supply side of the market has been constrained for several years,” says Lagerdien. “If you look at total debt in issue, we are only now beginning to approach pre-Covid levels.” At the same time, investor demand for credit has increased substantially.

Institutional investors, balanced funds and other market participants have increasingly allocated capital to investment-grade credit, creating a clear imbalance between supply and demand. The result has been steadily declining credit spreads.

Credit spreads represent the premium investors receive for taking on credit risk. Under normal market conditions, spreads should reflect both the quality of the issuer and broader economic risks. However, current market dynamics tell a different story. “There is simply too much money chasing too few opportunities,” says Lagerdien. “That has caused credit spreads to compress significantly, making it increasingly difficult to find attractive yield opportunities.”

When fundamentals take a back seat

Ordinarily, global uncertainty would be expected to influence credit pricing. Geopolitical tensions, inflationary pressures and supply chain disruptions should theoretically result in higher risk premiums as investors demand greater compensation for uncertainty. Yet that has not necessarily happened.

“From a theoretical perspective, global events should influence spreads,” says Lagerdien. “But in practice, the demand-supply imbalance is currently overpowering many of those fundamental considerations.” This means technical market factors are playing a more significant role than traditional credit fundamentals. For investors, that creates a challenging environment in which identifying value requires deeper analysis and greater selectivity.

Looking beyond public auctions

One of the key advantages Futuregrowth believes it offers is its ability to source opportunities beyond traditional public debt issuance. Many investors rely heavily on primary market auctions, waiting for issuers to bring debt to market before participating. Futuregrowth’s DCM approach is more proactive and origination-led.

“If you only rely on public auctions, you are effectively waiting for opportunities to come to you,” says Lagerdien. “In a highly competitive market, that can mean missing out on allocations altogether.” Instead, the team actively engages with issuers, banks and intermediaries to access opportunities through private placements, secondary market transactions and tailored structures. This flexibility becomes particularly valuable in a supply-constrained environment.

Research conducted by the team suggests that roughly half of the listed credit market activity occurs outside traditional public auctions, highlighting the importance of having broader origination capabilities. “You need to be able to access opportunities in multiple ways if you want a scalable investment approach,” Lagerdien explains.

The value of independent credit analysis

A further differentiator is Futuregrowth’s emphasis on internal credit analysis. While credit ratings from agencies provide reference points, Lagerdien argues that external credit ratings should not be relied on exclusively. “Ratings agencies provide valuable insights, but they should never replace independent analysis,” she says.

In a market where spreads are increasingly influenced by technical demand, that independent view of credit risk becomes especially important in supporting pricing discipline and relative value decisions.

The point has become increasingly relevant following changes in South Africa’s ratings landscape, including the withdrawal of some international agencies from local operations.

Futuregrowth’s investment process is built around internal credit assessments conducted by fundamental analysts who evaluate issuers continuously rather than relying solely on periodic external reviews. “Our analysts are looking at businesses, sectors and market developments on an ongoing basis,” says Lagerdien. “That allows us to respond more dynamically when circumstances change and to assess relative value more independently.”

The approach is supported by decades of credit-investing experience and a well-established, highly experienced credit committee within the business. For advisers evaluating fixed-income managers, Lagerdien believes this depth of internal expertise should be an important consideration. “Ultimately, it comes down to people, processes and systems,” she says. “You need confidence that a manager truly understands the risks they are taking on behalf of investors.”

Selectivity matters

In today’s market, generating returns requires more than simply finding available credit opportunities. Futuregrowth's DCM team believes careful portfolio construction is essential. The team evaluates opportunities through multiple lenses, including sector exposure, duration, seniority within capital structures and interest-rate positioning. “We have to be highly selective,” says Lagerdien. “In an environment where spreads are tight, the risk of mispriced credit increases.”

This means making deliberate decisions about where to allocate capital and where not to. Sector resilience, issuer quality and market conditions all play a role in determining investment outcomes. The process is supported by Futuregrowth’s broader fixed-income capability, including specialist interest-rate expertise and collaboration with its private debt team.

Responsible investing remains central

One aspect of Futuregrowth’s philosophy that remains essential across all business units is responsible investing. As such, environmental, social and governance considerations continue to form an integral part of the DCM investment process. For Lagerdien, governance remains particularly important. “At the end of the day, businesses are run by people,” she says. “You have to understand governance structures, board composition, oversight mechanisms and how decisions are being made.”

Futuregrowth has also become well known for its willingness to engage directly with management teams and policymakers when governance concerns arise.

One of its most prominent interventions occurred in 2016, when the firm publicly raised concerns about governance failures at state-owned enterprises. “We take our fiduciary responsibilities seriously,” says Lagerdien. “Responsible investing is not a separate exercise. It is embedded in how we assess risk and protect client capital.”

More than a new name

For advisers, the key takeaway is that the transition from Listed Credit to Debt Capital Markets does not represent a change in investment philosophy. Rather, it is a clearer articulation of capabilities that have existed for years and are increasingly relevant in the current market environment. Futuregrowth’s DCM team continues to focus on high-quality issuers, rigorous credit analysis and active opportunity sourcing. What has changed is the language used to describe that capability. “The process, discipline and expertise have always been there,” says Lagerdien. “The new name simply reflects our ability to operate across a broader debt capital markets opportunity set.”

As South Africa’s credit landscape becomes increasingly competitive and complex, that flexibility may prove more important than ever. For advisers seeking stable fixed-income exposure in a market characterised by limited supply, compressed spreads and heightened uncertainty, understanding how asset managers access, assess and price opportunities could be just as important as understanding what they invest in.

This article was originally published in the June issue of Money Marketing SA.