Over a third of investors plan to increase their allocation to private debt over the next 12 months.
Investor demand for private debt assets is increasing thanks to a host of macroeconomic factors, according to a new report commissioned in December 2017 by Intertrust.
Nearly two-thirds (63 per cent) of institutional investors expect the private debt market to grow in 2018 while 36 per cent of investors plan to increase their allocation to private debt.
Direct lending was the most favoured strategy ahead of infrastructure debt, real estate debt and credit-focused special situations. Of those institutional investors expecting private debt investment to continue growing over 2018 one in five expect to see a ‘significant’ increase.
Over a third (36 per cent) of investors plan to increase their allocation to private debt over the next 12 months compared to just 6 per cent who intend to reduce their exposure to the asset class.
The majority of investors (55 per cent) cited direct lending as their most favoured strategy ahead of infrastructure debt (52 per cent), real estate debt (45 per cent) and credit-focused special situations (30 per cent).
Underlining the level of returns generated by the asset class, almost a quarter (22 per cent) of respondents said their private debt investments have exceeded expectations in the last three years, up from 15 per cent in Intertrust’s 2016 private debt survey.
According to respondents, regulation (61 per cent) was the biggest challenge facing the direct lending market over the coming years, followed by fee pressures (increasing from 28 per cent in 2016 to 48 per cent in 2017). With their ability to offer competitive rates, a resurgence of bank lending was also cited by a quarter (24 per cent) of respondents as a key challenge facing the sector.
Paul Lawrence, Global Head of Fund Services at Intertrust, said: “The private debt sector can certainly count on enjoying another strong year ahead. Driven by growing investor demand and macro-economic tailwinds, private debt has evolved into a sizeable, influential asset class in its own right- and as such, will continue to attract more managers.”
“Even with concerns around regulation and a growing demand for reduced fees from some investors, the primary drivers behind growth in the sector remain largely in place.”