Where to Invest in Private Debt

Saturated with capital and investment options, the private debt market has become increasingly complex and difficult for asset allocators to navigate. But there is still value to be found in the asset class, according to a new report from advisory firm Willis Towers Watson.

“In recent years, meaningful investor capital has flowed into the private debt market making it more challenging to find value today,” said Chris Redmond, the firm’s global head of credit and diversifying strategies, in a statement. “However, we feel there are compelling opportunities to be found if investors remain selective, with good value for risk taken for those investors willing and able to go the extra mile and unearth interesting opportunities.”

In the report, the consulting firm said it sees two major opportunities for private debt investors amid current market conditions: U.S. residential mortgages, and U.K. real estate bridge lending. 

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The former, according to Willis Towers Watson, is an opportunity to target an underserved segment of the asset class.

“The U.S. residential mortgage market is one of the largest and best-followed credit markets globally, so it seems difficult to believe there are poorly served borrowers,” the report stated. However, at least one group still needs cash: mortgage seekers who don’t qualify for the loans based on federal government standards, whether because they are self-employed or are working on improving their credit. The consulting firm believes there is an opportunity to lend to “credit-starved borrowers that are genuinely deserving.”

Although there is a risk to taking on these types of mortgages, it doesn’t reach the magnitude of the risky loans made ahead of the 2008 financial crisis, according to Willis Towers Watson.

“It’s a sector that we believe has demonstrated improved fundamentals while delivering excellent performance, both on an absolute and risk-adjusted basis,” Redmond said.

The other private credit opportunity highlighted by the consulting firm is is real estate bridge lending in the U.K. 

“Regulation has greatly increased the cost of capital for bank lending against property, encouraging them to reduce the loan-to-value ratios and reducing the incentive to lend against non-income producing property,” the report stated. In addition, 2013 legislation has made it easier to convert properties from offices to residences, which in turn, “helped support commercial property valuations by taking supply off the market,” according to Willis Towers Watson.

“These factors have created a highly attractive opportunity to provide short-term lending against non-income producing commercial real estate at a meaningful yield premium,” the report stated.