Good track record with manageable default rates in private debt markets present yield-seeking investors with a credible option
Chief Investment Office 2 Mar 2022
- Hunt for yield & a stellar track record have seen private debt go from niche to mainstream
- Investors gain access to variety of strategies including direct lending, mezzanine funds etc
- Returns of private debt eclipse most forms of public debt
- Default rates have been kept low, keeping risk-taking manageable
- Benefits include protection from rising rates, more control & lower volatility
Broadening the search for yield. The decade since the Global Financial Crisis (GFC) in 2008 has shown investors that unbelievably low yields can go lower still. This seemingly “no-exit” strategy of unconventional monetary policy around the world simultaneously creates a (i) Dearth of income- generating assets on top of (ii) Excessive amounts of financial liquidity, turning investors into scavengers looking far and wide in search for yield.
The hunt has led many investors to warm up to the niche world of private debt – an alternative asset class that once drew caution due to its opacity. That is no longer the case. Private debt investments have since been able to produce a stellar performance track record, leading investors of all types – including perennially-conservative pension funds – to continue to allocate capital to this alternative with rising enthusiasm. Most notably, the AUM of private debt has seen steady growth in the last decade, with a compound annual growth rate (CAGR) of 11.7% in the ten years since 2009.
Debt in all its shapes and forms. Within the realm of private debt, investors are offered a variety of strategies that cater to specific risk preferences and opportunity sets.
- Direct Lending
- Mezzanine Funds
- Distressed Debt
- Special Situations
- Project Financing
From niche to mainstream. The aggressive actions of central banks in 2020 – despite rescuing markets from a tsunami of distress – did not eliminate defaults; they merely dispersed a giant wave into smaller ripples, creating plenty of distressed investing opportunities in the years to come. Combined with the maturation of the markets, private debt now boasts knowledgeable fund managers with observable and verifiable track records, making it easier to select managers in this asset class.
Investors now stand at a unique inflection point where opportunity meets expertise, making private debt an asset class that will be increasingly difficult to avoid for the discerning investor in the foreseeable future.