Regardless of ongoing concern about the ability of interest rate hikes, recession and high inflation to impact the performance of private markets portfolios, investors are more bullish than ever on investing in private debt.
The results of Private Debt Investor’s LP Perspectives 2024 Study show LPs are positive about investing in private markets in the long run, while being mindful of the effects of continuing macroeconomic uncertainty in the near term.
Raphael Schorr, partner and deputy CIO at HighVista Credit, says: “When you look at existing private credit investments, it is no surprise that those made over the past decade have performed well, particularly when traded credit benchmarks had low yields, given the zero rate environment.”
When it comes to new loans, some 92 percent of LPs tell us they plan to invest the same or more in private debt over the next 12 months – the highest figure we have seen in the past five years.
“You have strong fundamentals, high interest rates, reasonable spreads and much more sober credit conditions,” says Schorr. “It makes sense for allocators to invest more capital in private credit because of these attractive conditions and without regard to past performance.”
There will be bumps ahead, but this year’s data shows investors remain fully committed to private credit’s ability to withstand some testing times.
Going into 2024, more than half of the investors surveyed by PDI indicate that they are planning to allocate more to private debt this year than they did through 2023. Fewer than one in 10 intend to allocate less this year than last, indicating the most positive outlook for the asset class that we have seen in the past five years.
After a blip last year when nearly 20 percent of investors described themselves as overallocated to private credit, we now see a return to a more normal position with around half of LPs saying they are underallocated. In all, four out of 10 LPs say they are currently at their target allocation in private debt, with 9 percent overallocated.
We continue to see some denominator effect-driven adjustments in private markets portfolios, though those were a more common feature of the last 12-18 months.
Looking back at the performance of private credit portfolios in the past year, nearly nine out of 10 investors say they have met or exceeded benchmarks, with just 11 percent suggesting that their portfolios fell below expectations. With one in three saying private debt exceeded benchmarks, the 2024 figures are in line with the findings of the last two years, suggesting the asset class has had a solid run of satisfying investor expectations.
Looking forward, investors are excited about the potential for the asset class to exceed returns on offer elsewhere, as we enter what some have described as a ‘golden age’ for private debt.
Not a single one of the LPs who completed our survey expressed concern that private debt might fall below expectations in the year ahead, with more than half expecting the asset class to exceed benchmarks in 2024.
Investors are as mindful as ever of the challenging macroeconomic environment for private markets portfolios. Interest rate hikes, recession in core markets and high inflation remain the three factors that they expect to most impact the performance of their assets through 2024. While interest rates are expected to stabilise this year, the level of concern has dropped only slightly. Likewise, fears about recession have hardly lessened – from 60 percent a year ago to 59 percent today. Geopolitical uncertainty was chosen by just under one-third of respondents.
The long game
LPs appear confident in the ability of private markets to outperform the public markets in the long run, with three out of four positive about the outlook. In the short run, however, just 46 percent of investors are positive on private markets investing versus public markets, with 21 percent negative given the high interest rate and inflationary environment.
The majority of LPs believe that a strong ESG policy will lead to better long-term returns in their portfolios, though the number has diminished over the past three years. Today, 59 percent back a strong ESG policy to increase returns, down from 74 percent in 2022. There is most support among European investors, where 79 percent believe in the correlation between ESG policies and returns, but this falls to just 41 percent in North America.