Private debt attracts a wide variety of investors, led by public- and private-sector pension funds and foundations and endowments, which account for 29 percent and 22 percent, respectively, of the investor pool, according to a new study by SEI in collaboration with Preqin, an alternatives data provider.
However, the study concluded family offices indicate a shift toward the individual investor segment with 10 percent in average allocations, and 59 percent of managers expect it to be an even more important source of capital going forward.
Approximately $100 billion was raised by private debt funds in 2015 and again in 2016, matching the high watermark previously seen in 2008. Interest continued apace in 2017, as investors put almost $120 billion into private debt funds. Assets under management skyrocketed from $245 billion in 2008 to almost $667 billion a decade later. They are projected to double again by 2023.
By and large, investors in private debt are content. According to Preqin, two out of three say their private debt investments met expectations over the past 12 months.
Fundraising slowed down through the first three quarters of 2018, but did not dropped precipitously. More interesting than the magnitude of current growth, however, is its composition. Investors are seeking the safety of established managers with demonstrable track records with whom they may already have relationships and in some cases seeking to amplify these relationships by establishing “strategic relationships” or SMAs. This trend means assets are increasingly concentrated in fewer hands.
During the second quarter 2018, the five largest private debt funds raised $28 billion — or 66 percent of total assets raised. Investor attention is also being redirected among subcategories. Interest in direct lending and mezzanine credit all but evaporated in second quarter 2018 as investors turned instead to special situations. These developments suggest that we may not necessarily see more deal volume, but bigger transactions are almost guaranteed.
While North American investors comprise 57 percent of the estimated 3,100 institutions in the asset class globally, they are not the biggest allocators to private debt products as a percentage of their overall portfolios. That distinction belongs to institutional investors in Asia, who currently allocate an average of 5.9 percent of their portfolios to private debt funds.
And European investors accounted for a sizeable share of the global total, 5.5 percent.
