Distressed debt has become the most preferred strategy among investors in the first three months of the year.
Private credit investors are increasingly opting for higher-risk strategies such as special situations and distressed debt, according to research from Preqin.
The number of investors opting for vehicles specialising in this higher risk part of the market has increased from Q1 2017 to Q1 2018, Preqin found, with the largest share - 52 per cent - of investors now showing a preference for distressed debt.
The proportion of investors targeting special situations funds saw the greatest increase over the past year, however, rising from 27 per cent of investors in Q1 2017 to 37 per cent in Q1 2018.
Preqin also found that there are now 3,200 investors active in the private debt universe, an increase of 100 from the end of 2017. Appetite for private debt investments in Europe have in particular seen growth over the past 12 months. The research found 60 per cent of private debt investors are seeking opportunities in Europe in Q1 2018 compared to 41 per cent in Q1 2017.
Interest is still fairly concentrated with the 10 largest investors holding $71bn of assets. This represents almost 30 per cent of aggregate capital allocated to private debt. Tom Carr, head of private debt products says an increasing number of investors are turning to private debt.
“While the total number of active investors has grown by over 100 in just the past quarter, the universe remains dominated by a small group of the most influential institutions: the 10 largest investors alone account for close to 30 per cent of aggregate capital flowing into the asset class,” he said.
“The appeal of higher-risk strategies like distressed debt and special situations is growing: a potential market correction would provide increased opportunities for these fund types to capitalise on. This may be why we have seen distressed debt overtake direct lending as the most sought-after strategy, while appetite for special situations funds has grown further than for any other fund type.”