Demand for private debt to stay high

The appeal of alternative assets has broadened, reflected by the inclusion of 'illiquid credit' and 'real assets', as two new asset classes in the Tower Watson survey this year.

Demand for private debt strategies is expected to remain high, particularly for asset classes offering floating rate yields, according to a new survey from research group Tower Watson published in conjunction with the Financial Times.

The Global Alternatives Survey 2014, with responses from 24 illiquid credit managers out of 531 investment managers altogether, found that expected rises in a low interest rate environment combined with a desire for yield, would result in private debt and distressed debt remaining attractive to investors.

Having canvassed private debt managers – including direct lenders, commercial real estate debt managers and mezzanine lenders – the survey found that the key trend in the sector over the past year was the emergence of an institutional lending landscape in Europe.

As banks deleverage to meet increased regulatory capital requirements, their pull-back from lending has created opportunities for asset managers, with the most popular financing strategies being in real estate, infrastructure and SME lending.

The survey also found that yield compression in more liquid forms of alternative credit, such as leveraged loans, high yield and securitised credit markets, had driven “increased interest across developed markets for private debt strategies that offer greater returns for seemingly comparable risk”.

Illiquid creidt has piqued investor interest. However, some asset classes within illiquid credit are expected to become less attractive as more institutional capital flows in, such as lending against prime commercial real estate, where yield compression has been very pronounced in the last 12 months.

On the subject of distressed debt, the survey found that a lot of money was raised to invest in the sector post-crisis in the expectation of an “elevated default cycle”. However, this proved to be a “temporary phenomenon” amid increased liquidity, as a result of central bank policy.

Managers are now finding it more difficult to raise money for distressed debt strategies, the survey found. More successful strategies have been those with a broader mandate, such as managers focused on purchasing non-performing loans from banks. “European biased strategies appear to be preferred by investors currently,” the survey found.

Some managers raised the possibility of a correction in the near-term fuelling demand in distressed debt. “We would also expect that distressed debt strategies will continue to attract some interest, with commentators [pointing] to buoyant credit markets as possibly sowing the seed of an elevated default cycle 2-3 years out,” the report said.

The top 100 alternative asset managers managed $3.3 trillion in assets under management (AUM) in 2013, up from $3.1 trillion in 2014. Of these managers, three were illiquid credit managers, looking after $77.7 billion between them.

M&G Investments is the largest illiquid credit manager with $31.5 billion AUM. Sankaty Advisors came second with $23.6 billion AUM while the Alcentra Group came third with $22.7 billion AUM.

The survey, which itemised illiquid credit and real assets for the first time this year, also looked at data from 58 other publicly available sources. The other alternative asset classes included in the research were hedge funds, private equity, real estate, infrastructure and commodities.