The migration of private wealth

Taking fright at the vicissitudes of the public market and cognisant of the possibility of tougher times ahead, high-net-worth investors are increasing their exposure to private debt.

As a still relatively young asset class, private debt has spent much of its time casting its rod into institutional investor waters. Not all LPs have private debt allocations, but many now do. Inching those allocations higher is an ongoing task, but the evangelising process has at least brought private debt on to the radar of most pension funds and insurance companies.

Now there is a new movement of capital into the asset class as high-net-worth individuals ramp up exposures. A recent survey by Connection Capital – which helps professional clients build alternative asset portfolios – found that 35 percent of the firm’s HNW clients are allocating 20 percent or more of their investment portfolio to alternative assets. This figure has moved up from 26 percent of clients last year.

According to market sources, many HNW investors – amid the collapse of the Neil Woodford empire – have pulled out of public market positions (to the extent they have been able to) and reallocated to cash and alternatives. Cash is viewed as a way of having capital to invest immediately into any opportunities created by a downturn. Alternatives represent superior risk-adjusted returns, for which HNW investors are prepared to accept illiquidity.

Within the alternative asset universe, Connection Capital says it is noting particular interest in private debt. HNW investment will not move the needle of capital allocation in the way institutions have done. However, it could make a material difference to certain “under the radar” strategies where most HNW attention is focused.

Over the next few years, HNW investors believe there will be opportunities in niche areas outside the well-populated direct lending market. First-time fund? New strategy? High risk-return? If these are your fund’s characteristics, you should probably not expect institutional investors to roll out the red carpet. But, as one source said to us, HNW investors “think differently”. Above all, they are opportunistic and will not rule something out just because it doesn’t fit an orthodox mould.

In recent coverage, PDI has explored the multitude of “speciality” strategies ranging across special situations, asset-backed lending, aircraft leasing, royalties and many others. Investors are showing increasing interest in these strategies amid an acknowledgement that competition is squeezing returns in certain mainstream parts of the market. For these strategies this may provide hope of a successful fundraise that would not otherwise have existed.

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