Private Debt: The New Alternative For Institutional Investors?

A Preqin report says two-thirds of institutional investors are considering investing in private debt

A new research report from Preqin focuses on the rapidly growing private debt market within the alternatives sector, in particular on how institutional investors are finding value in undertaking financing roles that banks played until the recent financial crisis.

Institutional investors’ view on private debt market

The Preqin report surveyed 240 institutional investors to get answers to the following questions:

• How do institutional investors view the private debt market?
• Do they consider the segment as private equity, fixed income, or a hybrid of structures?
• Which fund strategies are most sought after?
• What do target returns tell us about risk appetite and performance expectations?”

Of note, two out of three institutional investors have invested in or are considering investing in private debt, and 78% of institutional investors look for direct lending funds when investing in private debt.

Details on survey results

Breaking down the Preqin survey data, more than two-thirds of institutional investors surveyed are active in or are considering investing in private debt. The reports says this suggests a “continued warming toward the wide array of private debt fund structures.”

The mean current allocation to private debt instruments among survey respondents was 5.6%, with a median allocation of 2.1%. However, 73% said they had no target allocation, “suggesting there may be opportunistic investing in the space, or the allocation is coming from broadly defined pools (Fig. 3)”.

Moreover, although a growing number of large public firms continue to launch exclusively debt-focused units, many institutional investors plan to allocate to private debt from fixed income (24%), private equity (20%) or general alternatives buckets (19%). The Preqin report mentions that one large U.S.-based pension fund said that they currently have “a private debt allocation of 1.8% of total assets, pulled from a private equity bucket.”

High returns targeted

Institutional investors expect to earn strong returns on their private debt investments. Preqin’s survey reported that aggregated target returns for private debt investors generally came out in a range of 8%-14%, with the size of the range “reflecting the variety of investment goals and expectations among LPs.” However, the report also noted that target returns for investors varied significantly by region, with North American investors looking for somewhat higher returns from their private debt portfolio at 9%-15% relative to European fund managers at 7%-13%).