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.
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