Institutional investors are increasingly interested in private credit — and managers are taking note.
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Allocators Want Private Credit. Here’s Where They’re Getting It.
In the U.S., investors favor distressed and real estate debt, according to Coalition Greenwich.
According to Coalition Greenwich, more than half of institutions have already put money to work in private credit. Approximately 40 percent of those institutions are planning to increase their slate of managers over the next three years.
A combination of stock losses, rising interest rates, inflation, and projected lower private equity returns has sparked investor interest in the asset class.
Plenty of recent deals illustrate the point. Last month, Delta Airlines CIO Jon Glidden told Institutional Investor that the pension fund is looking at assets like collateralized mortgage obligations, asset-backed securities, and mezzanine debt to take advantage of falling valuations.
Australia’s QIC announced Tuesday that it has expanded its private debt portfolio, completing two direct senior secured loan deals, one in the diagnostics imaging sector, and another in family entertainment. The loans total $1 billion, according to QIC.
“In these rough economic waters, we see private debt as one of the steadier ships for investors to sail on,” said Phil Miall, head of multisector private debt at the superannuation fund and asset manager, in a statement.
He added: “These latest deals are a prime illustration of the high quality, appealing yields we believe are currently available to private debt investors, and we anticipate the time is ripe for a strategic asset class overallocation.”
Globally, ten percent of investors who haven’t touched private credit have plans to do so now. In the U.S., investors favor distressed and real estate debt, according to Greenwich. In Europe and Japan, investors are more interested in direct lending and infrastructure. Greenwich interviewed investors at 220 institutions across North America, Europe, and Japan between September and November 2022 to compile the data.
Managers have taken note of this interest.
On Tuesday, D.E. Shaw announced that its private credit-focused Diopter Fund had received more than $650 million in capital commitments. The fund’s primary investments will be synthetic securitizations. While this isn’t D.E. Shaw’s first go at investing in private credit — the firm first invested in the asset class in 2008 — it is a new launch.
“We see attractive opportunities in the synthetic securitization marketplace, and issuance appears poised to accelerate further as the regulatory landscape for financial institutions evolves and the banking sector seeks to better manage risks, optimize balance sheets, and improve profitability,” said Rich McKinney, who oversees the firm’s private credit unit.
Metlife Investment Management, meanwhile, announced the acquisition of a private credit firm, Raven Capital Management, in an effort to build up its presence in that asset class.
These managers — and the asset owners allocating capital to them — will face a big challenge in the coming months, according to Greenwich. The firm said that high yields and concerns about a recession could represent “the first real test” for the ballooning private credit market.
“The next six months will provide some valuable perspective on the performance and resilience of what many institutional investors see as a new and less familiar asset class,” said Mark Buckley, head of investment management at Greenwich, in a statement.