Private credit has benefited from a low-rate environment and a thirst for yield, but higher official borrowing costs might chill the market.
The large majority of investment consultants in a recent survey say rising interest rates could hit the recently-expanded market for private debt, after the asset class’s returns pleased clients last year.
The market for private debt, fuelled by the search for alternative sources of credit in the aftermath of the 2008 financial crisis when conventional bank and bond finance was hit, has also benefited from its superior yield profile. However, if or when the US Federal Reserve and certain other central banks tighten ultra-loose monetary policy, the party could end, according to Preqin, the research firm.
Preqin’s year-end surveys of 36 alternative investment consultants found that four out of 10 feel private debt has outperformed their expectations in 2017 – the highest proportion of any asset class. As a result, even as fundraising and assets under management reach record highs, the majority (53 per cent recommend that investors increase their allocations to private debt in 2018.
Some 8 per cent of consultants now recommend that private debt investments form more than 15 per cent of investors’ portfolios, a proportion that no surveyed consultant advised a year before.
“The rapid expansion of the private debt market in recent years means the industry now has raised more money and holds more assets than at any time before. Despite this, four out of 10 investment consultants report that the industry has exceeded their expectations, and the majority are telling investors to double down on private debt in the year to come. More than that, they are beginning to suggest that private debt holdings should comprise a much larger part of investors’ portfolios than they have historically,” Ryan Flanders, head of private debt products at Preqin, said.
But the study contains this warning: “These recommendations come despite key issues facing the industry in 2018: three out of four consultants note that central banks raising interest rates in key markets will be a challenge for the market in 2018.”
In late November 2016 industry figures told this publication that while private credit was certainly an asset class gaining traction, inflows into the sector could see variation in fund-raisings. There are also concerns that the hunt for yield could push investors up the risk spectrum more than they would have previously wanted.