21 July 2018

Private Debt: An Alternative Player

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Private debt has emerged as a new alternative investment—with the potential for immediate returns and low correlations—that is appealing to investors on the hunt for yield in the years since the financial crisis. Prompted by increasingly stringent regulations that closely monitor traditional banks’ lending practices, debt fund managers have stepped into newly created opportunities, where previously they had been committed to traditional fixed income and alternatives.

The fundraising outlook for private debt managers is optimistic, as capital has been flowing out of corporate and sovereign debt and into the private sector. According to a survey conducted by Preqin, a research and consultancy firm focusing on alternative asset classes, two thirds of more than 240 institutional investors surveyed said they had already invested in private debt or were considering investing. Among these asset owners, the current average allocation was 5.6%.

Investors also said they planned to allocate to private debt by moving capital from traditional fixed income (24%), private equity (20%), and broader alternative buckets (19%). Their target returns ranged from 8% to 14%, with North American investors anticipating more aggressive returns—between 9% and 15%—than their European counterparts.

The majority—78%—of surveyed investors said direct lending debt was the most attractive strategy, followed by mezzanines at 61% and distressed debt at 59%. The least desirable fund type was junior debt, with only 38% of investors expressing interest.

However, Preqin found challenges still exist for this burgeoning new asset class as private debt managers need to successfully structure and position funds within portfolios—a task largely done by altering allocations to alternatives and traditional fixed income.

Click here to access the full article on Chief Investment Officer. 

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