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Private debt is catching on among investors, asset managers
The asset class is seen outperforming key bond indices
Bayani S Cruz 1 Feb 2017

Private debt as an alternative investment is catching on among Asian investors and global asset managers who are seeking assets with returns that are higher than those of bonds or equity.

Private debt generally consists of direct lending, distressed debt and mezzanine debt by corporates. In recent years private debt has been providing consistent returns, which coupled with low corporate default rates and unattractive yields on traditional fixed income assets, are making this asset class more attractive to investors.

Data from Preqin indicate that since 1997, the longest period for which data are available, private debt has outperformed two key fixed income indices, investment grade and high yield bond indices.

From 1989 to 2011, private debt fund returns have also been stable throughout market cycles, relative to equity indices with a standard deviation over the period of 0.017 versus 0.71.

The average allocation to the asset class by private debt investor type reveals how different types of institutions are using various strategies to incorporate alternative lending into their portfolios, adds Preqin, citing its survey, Investor Outlook: Alternative Assets H2 2016. Family offices continue to lead the way with an average current allocation of 21.8% of total assets (see graph). Family offices often have more flexibility in mandates and investing goals due to the smaller pool of underlying investors that face less restrictions in when it comes to investing, according to the survey.

Public and private sector pension funds, along with insurance companies, have relatively lower average current allocations at 3.5%, 2.8% and 2.9%, respectively. Nonetheless, as the largest investors by asset under management, and the most prevalent investor types by number, they control a significantly larger portion of private debt capital when compared with other investor types, and thus serve as the cornerstone investors for many private debt managers.

In terms of portfolio diversification, institutional investors have found that private debt is perceived as having superior protections versus traditional bonds and equity-like returns, according to Professor Amin Rajan, chief executive of Create Research.

“Institutional investors were attracted by private debt’s two merits, namely, returns which can outperform some equity and fixed income indices and low correlation with other asset classes,” says Rajan.

In light of this development, global asset managers such as Allianz Global Investors (AllianzGI), have been strengthening their capabilities in private debt investment.

“In the private debt space, you really need a comprehensive and focused set of credit skills. Because you’re often sourcing individual credits, they are illiquid. By definition it means the investors expect to stay in these transactions. Most of the investors go into it knowing that they will not really be actively trading it,” says Deborah Zurkow, head of alternatives at Allianz Global Investors, in an interview with The Asset.

AllianzGI has added three teams dedicated to private debt, investing as part of their alternatives investment unit with a view to building this asset class in 2017. Two of the teams were from Allianz Investment Management, a sister company of AllianzGI, while the third team was the acquisition of Sound Harbor Partners, a New York-based asset manager.

Following the acquisitions, AllianzGI will manage over €21 billion (US$22.4 billion) in private debt from 2017.

“We are also looking to deliver private debt to retail investors, and we want to ensure we can do that in a responsible way,” says Zurkow.

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