With Better Pricing and Structures, Private Debt Attracts Investors

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Attractive returns on the strength of a healthy M&A pipeline have fueled an increase in institutional investors’ demand for private financing.

Preqin, a data company, predicts that the market would increase at an average rate of 10.8% annually to reach US$2.3 trillion ($3.55 trillion) by 2027, or about twice as much as the US$1.2 trillion finished in 2021.

Participants from super funds, fund managers, and asset consultants participate in a roundtable discussion sponsored by Investment Magazine and global asset manager Invesco. The discussion covers the role of private credit in an asset portfolio against a weakening global economy, the effect of the Your Future, Your Super performance test on allocations, the difficulties in deploying capital in the asset class, and how ESG risks are incorporated into direct lending strategies.

Scott Baskind, head of Invesco’s US$40 billion global private credit strategy, noted that there had been a “dramatic shift” in the risk’s location from on balance sheets within banks to now within funds and asset owners globally.

“These new vintage transactions have wider yields, much tighter structural protections and, therefore, should have lower risks,” Baskind said. “On a combined basis, that repricing has already occurred, but it’s not just on an absolute basis. It’s on a risk-adjusted basis.”

While according to Jeffrey Reemer, managing director at Invesco global senior loan group, the direct lending market is yielding about 11% compared to the syndicated leveraged loan market’s yield of about 10.5%. These yields are expected to remain stable for some time.

“I don’t foresee loan spreads repricing tighter because of the macro-overlay from Russia, Ukraine and the uncertainty around pulling the money out of the financial system,” Reemer added.

Many asset owners and portfolio managers have been compelled by the current market conditions to shift their holdings towards more liquid assets.

Additionally, the state of the market makes it difficult for investors to put money into the industry. “It’s incredibly difficult to time the bottom in any market, particularly in an illiquid market like direct lending. For me, it’s about trying to average in and making sure as asset owners you are ready to deploy,”  Ashley O’Connor, head of the investment strategy at Invesco Australia, said.

The growth in private debt and its appeal to institutional investors is further evidence that the alternative asset class is becoming an essential part of any diversified investment portfolio. 

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