Allocator appetite for private credit remains strong. But they’re becoming more selective about the managers they hire.
New data from Institutional Investor show that most investors believe manager selection will matter significantly more going forward than it did over the past decade. Despite the increasing challenges, including redemption pressures from retail investors, more than two-thirds of institutional allocators plan to maintain their private credit allocations with fewer managers.
Nearly a quarter of allocators see the current environment as a chance to up their private credit investments while only about a tenth of respondents to II’s survey intend to reduce their exposures.
After years of low interest rates, which masked managers’ mistakes in underwriting and risk-taking, the current economic environment is exposing a huge gap in origination quality and covenant discipline among managers. But allocators aren’t panicked: More than half see the current challenges as cyclical rather than structural, with 62 percent expecting private credit to emerge stronger. In addition, 75.5 percent of allocators agree that periods of market stress are the best times to reassess managers and renegotiate terms for the future.
Paul O'Brien, trustee for the $13 billion Wyoming Retirement System, shares the investment industry’s optimism towards private credit, as it serves funds “that need regular cashflows and it gives them a way to stay in private assets while moving up the capital structure to more senior exposures.”
When it comes to manager selection, he believes that most allocators are better off selecting multisector managers that can work across a range of sectors than hiring specialists.
“Relative value fluctuates far more quickly than an allocator can keep up with,” O’Brien said, adding that multisector funds may help diversify private credit portfolios but may not be enough for all investors.
The influx of retail capital and growth of retail-oriented investment vehicles has revealed itself to be a bigger concern for institutions than interest rates or extended borrower leverage, with nearly half of respondents seeing this as the driver of current stress (while only 18 percent see higher-for-longer rates as the top cause and 12 percent cite elevated leverage).
The survey results, which are available online, were gathered from 146 global institutional investors this year. The majority of respondents were in North America (47.5 percent) and EMEA (34.8 percent).
