2020 posed many challenges but investors keep the faith

Our latest exploration of LP sentiment reveals investors may have taken some short-term measures to deal with private debt issues last year but that they remain confident in the future.

One or two stresses and strains appear to have been revealed in our latest fully downloadable presentation on investor sentiment. Nevertheless, our studies have consistently suggested that LPs can see past temporary difficulties to a bright future for private debt. Our research can be found here in full, but here are five key points:

1. In perhaps the most eye-catching – and probably the most downbeat – finding, the proportion of investors that moved capital out of private debt last year (38 percent) was greater than the percentage that increased their allocations (37 percent). The reasons why are not immediately clear, but it seems reasonable to assume that at least some LPs were spooked by the sudden deterioration in trading conditions brought on by the pandemic.

2. Clues to the withdrawal of capital may be found in investor views of performance. In 2019, 25 percent of investors said they thought their private debt portfolios would exceed their benchmarks while just 14 percent thought they would fall below them. Yet amid the chaos of last year, only 18 percent expected outperformance, compared with the 22 percent anticipating underperformance. When it comes to the current year, LPs’ faith is apparently restored – with 30 percent predicting outperformance and 20 percent underperformance.

3. Looking beyond whatever short-term concerns may exist, there is a clear trend for investors to ‘walk the talk’ when it comes their professed enthusiasm for private debt. The investors we spoke with had increased their average allocation to the asset class from 4.58 percent in 2017 to 6.32 percent last year.

4. We noted in our PDI 50 ranking that a clear majority of private debt’s most successful fundraisers were based in North America. Confirming the asset class’s strong bias to the region, nine of the 10 largest investors last year had North American headquarters. Florida Retirement System Trust Fund led the charge with 10 fund commitments.

5. There are no signs that North American managers will forego their dominance, if investor appetite by region is anything to go by. Almost three-quarters of investors (73 percent) said they have appetite for North America – exactly the same percentage we recorded in 2016. The level of appetite for all regions has remained highly consistent during this period. Demand for Western Europe has fallen slightly, but all other regions – such as Asia-Pacific and Central and Eastern Europe – have shown modest increases.

Write to the author at andy.t@peimedia.com