Asset owners are aiming to get in on anticipated opportunities in private debt and credit in light of what they see as a worldwide need for loans and relief from the high-priced public and private equity markets.
Private debt investments are not easily “bucketed” into existing asset allocations because they can have characteristics of more than one asset class. Indeed, some investors have created a new allocation to “opportunistic credit” for these investments, which can range from direct lending and mezzanine to distressed debt.
Institutional investors are investing in the private debt strategy in a big way. Capital raised for direct lending funds was up 29% in the first quarter, after reaching an all-time high last year, with 45 funds closing on $29.1 billion in 2014, according to London-based alternative investment research firm Preqin. Private debt funds raised $16 billion in the first quarter, up from $12 billion in the first quarter of 2014, moving the average size of a private debt fund to $941 million from $528 million in the respective quarters. As of April 17, private debt managers have raised 25 private debt funds this year with a combined $20 billion in capital.
Some asset owners are bumping up their allocations to private debt strategies. The $34.7 billion Arizona State Retirement System, Phoenix, is increasing its credit allocation to 10% from 3% to get exposure “to private markets where capital availability is needed,” according to minutes of its March 27 meeting. Private debt is part of the retirement system's 25% fixed-income allocation.
Adding to the buzz is General Electric Co.'s decision to sell its commercial lending business, which would be a huge win for private debt investors. The move is seen as another example of regulated lenders getting out of the commercial lending business as a result of federal regulations, leading leveraged loans to slump. All these factors point to plenty of room for the capital being raised for private debt.
Indeed, 50% of investors in private debt intend to commit more capital to the sector in 2015 than they had in 2014, with only 13% of investors planning to commit less capital, a Preqin survey shows.
Direct lending and other private debt strategies are now more established. Many private debtmanagers are working on their second funds, which is giving investors comfort to invest after seeing returns from their first funds. For example, on April 16, KKR & Co. LP closed on $1.5 billion for its second direct lending fund, which was oversubscribed and is three times the size of its first such fund.