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Investors Appear Poised to Continue Private Credit Allocations, Data Shows
But they’re split on whether valuations will increase in the near term, citing concerns about inflation and interest rates, an SS&C Intralinks survey shows.
After increasing their allocations to private credit over the past three years, investors expect the trend to continue, according to new data.
Virtual data room provider SS&C Intralinks polled 111 investors, 60 percent of whom had more than $1 billion in assets under management, about their views on the debt capital markets. The results showed that these investors are increasing allocations to the debt market generally — not just to private credit. The investors polled included family offices, pension funds, and insurers, among others.
More than half of those polled said that they increased their private debt allocation in the past three years, and there’s likely more to come: Fifty-nine percent of respondents said they expect to increase their allocation to the asset class again over the coming three years. “We're continuing to see that we have a lot of clients with a lot of cash or dry powder that they're looking to put to work,” said Ken Bisconti, co-head at SS&C Intralinks, via Zoom. “We're still seeing evidence of some pent-up demand from the slowdown in the pandemic, and there’s still a hunger for yield in investment opportunities.”
The data shows, however, that it's not just private debt that’s hot. Portfolio allocations to debt capital markets have grown from an average of 16 percent in early 2021 to an average of 36 percent this year. And SS&C expects this to grow further. Forty-three percent of respondents said they expect to add more debt capital to their portfolios in the coming year.
“What we’re hearing from our clients is that 2021 helped create relatively ideal conditions for economic growth,” Bisconti said. “The underlying fundamentals are strong. Corporates are reporting solid profitability. Default rates are low, and as such, investors continue to favor debt capital markets.”
Investors are split, however, on how asset valuations will perform in the coming months: 41 percent said they expect values to increase, while 40 percent expect a decrease. “If interest rate increases or inflation is drastic, the cost of capital and services increases, and then it’s more expensive for corporates to get loans,” Bisconti said. “There's definitely caution with those factors.”
The survey shows that 86 percent of respondents are either very concerned or concerned about inflation, while 76 percent are very concerned or concerned about interest rate risks. But in conversations with clients, Bisconti has found reason for optimism.
“We're hearing through our clients that we’re still in historically low rate environments,” he said. “In the United States, even though the Fed has indicated that there will be increases in rates, they’ll likely still be low. That encourages corporates and even individuals to turn to debt markets for financing, which is good for debt capital market investors.”