Private debt in high demand from sovereign wealth funds – report

Sovereign wealth managers are exhibiting strong demand for private credit due to their ability to tolerate illiquidity and take a long-term view.

Private credit funds are becoming increasingly attractive to sovereign wealth funds, with 63 percent of investors increasing their allocations to the asset class over the last three years.

Research by Invesco into the allocation priorities of sovereign funds found that alternative asset allocations have doubled since 2013 and private credit is becoming a regular tool in their portfolios.

Average allocation to alternative credit sits at 4 percent, though this increases to an average of 5 percent among the largest sovereign funds with more than $25 billion of assets under management.

“Alternative credit is particularly attractive to sovereigns that can tolerate illiquidity, because of its ability to generate higher yields than the core fixed income portfolios used to fund it,” the Invesco report said.

Smaller funds worth less than $10 billion tend to have the lowest allocations to both private debt and other alternatives, with private debt sitting at an average of 2 percent of a 15 percent total alternatives allocation.

Sovereign funds based in the western world have increased allocations to private debt the most often, with 78 percent increasing their commitments over the past three years, while Asian sovereign funds are close behind at 73 percent. Private credit is also seeing strong popularity with sovereigns in the Middle East, with 44 percent increasing their allocation, ahead of all other core alternative asset classes.

Sovereign funds were also most likely to identify private credit assets as being undervalued. Four in ten said they felt private credit was undervalued, compared to 25 percent for infrastructure, 8 percent for real estate and none for private equity. Just 6 percent felt the asset class was overvalued.

The report added: “Putting capital to work in private credit has been the easiest private market strategy to implement in recent years, in part due to less capital competing for these assets, and in part due to the post-financial crisis withdrawal of banks from certain forms of risky lending, with asset managers and institutional investors filling the void.”