Perspectives 2023: Seven charts that matter

PDI’s LP Perspectives 2023 Study finds investor sentiment holding up despite the uncertainty.

In an era of macroeconomic uncertainty and geopolitical instability, private debt is coming of age. While investors might be talking more than ever of being overallocated to private credit, a massive 89 percent of the allocators interviewed in Private Debt Investor’s LP Perspectives 2023 Study will either keep their investment the same or invest more capital in the year ahead.

What is more, despite such market turbulence, in this year’s survey fewer than one in 10 LPs report private debt performing below benchmarks last year and 39 percent say it exceeded them – the best results we have seen over the past six years of our report.

Limited partners are worried going into 2023. They are fearful of the impact of interest rates, inflation and recession on their private markets portfolios. But in the year ahead, a massive 47 percent of LPs plan to increase their investments in direct lending strategies.

We dig deeper into LP sentiment during turbulent times.

Allocation concerns

As we go into 2023, some 18 percent of LPs currently describe themselves as overallocated to private debt. That is the highest proportion we have seen since our survey began in 2018, double the previous high of 9 percent in 2021 and up significantly on the 3 percent that were overallocated a year ago. Likewise, fewer LPs than ever before describe themselves as underallocated – with just 34 percent feeling light on the asset class versus more than half a year ago.

Performance concerns

Going into 2023, private markets investors are anxious about the uncertain macroeconomic outlook and unstable geopolitical climate.

When asked about the three factors that will likely have the greatest impact on their private markets portfolios this year, LPs point resoundingly to rising interest rates, the threat of higher inflation and worries about recession in core markets. Last year’s top concern – extreme market valuations – now ranks in fourth place among the issues on LP minds.

Room for improvement on ESG

LPs continue to see room for improvement in managers’ ESG efforts. Of particular focus is diversity, equity and inclusion, where only 44 percent of LPs rate their GPs’ efforts as either good or excellent in relation to portfolio companies, and just 47 percent consider DE&I to be good or excellent at GP level.

Six in 10 LPs think their GPs are doing well at implementing their planned strategies, while the same number are satisfied that the frequency and quality of reporting coming from GPs is either good or excellent.

Making the commitment

Despite concerns about overallocation to the asset class, LP commitments to private credit show signs of maturity rather than capitulation. For the first time, more than half of LPs say they will keep their investment in private debt the same through 2023, with a further 38 percent intending to invest more capital than last year. While the proportion of LPs pouring additional funds into private debt is lower than we have seen historically, the number reducing their commitments is stable, suggesting another year of growth ahead.

In transition

With LIBOR officially discontinued at the beginning of 2022, LPs today feel the private debt industry has coped well with the transition. In all, 29 percent of investors think private debt has transitioned very well and a further 66 percent say it has done fairly well, with just 6 percent describing the process as poor.

Those figures are broadly positive compared with what was anticipated a year ago, when 16 percent felt the industry was poorly prepared for transition and 31 percent thought it was very prepared.

Benchmark beaters

At the end of another volatile year that continued to test the mettle of private debt fund managers, LPs are happier than ever with the performance of their private debt portfolios. A sizeable 39 percent of investors report that private debt exceeded benchmarks during 2022, a significant jump on the 21 percent that said the same last year and the highest level of outperformance we have seen since the survey began.

Only 9 percent say their private credit investments fell below benchmark in 2022, down from 33 percent two years ago.

Strategic choices

Direct lending strategies remain top of the shopping list for investors in private debt, with 47 percent of LPs planning to invest more in those during 2023 than they did last year.

Investors are split on distressed and special situations strategies, with 29 percent intending to invest more and 24 percent pulling back this year. Meanwhile, speciality finance continues to please investors, with 67 percent planning to either invest the same or more capital in the strategy in 2023.