Seven LP opinions that matter

With the vast majority of LPs telling us that their private credit investments met or exceeded expectations last year, it is perhaps of little surprise that almost half now plan to increase their allocations to private debt in the next 12 months.

Yet although investor appetite is positive on the back of the asset class performing well in two years of uncertainty, there are signs LPs are less optimistic than in the past, and do not necessarily expect such returns to continue. Only one in five expect their private debt portfolios to exceed benchmarks in 2022, down from 31 percent in 2021.

Direct lending remains the most attractive strategy with less interest in special situations/distressed strategies, venture debt and specialty finance. Private Debt Investor’s Perspectives 2022 Study gauges the expectations, hopes and fears of the LP community, against a complex and fast-moving macro backdrop.

Almost half of investors look to increase allocation

Appetite for private credit strategies remains bullish among investors, with almost 50 percent planning to increase their allocation in the next 12 months. That figure is significantly higher than in last year’s study, when 33 percent of investors expressed the same sentiment.

A further 39 percent of investors plan to keep allocations to private debt constant in the next 12 months, with only 12 percent expecting to commit less to the asset class.

Investments exceed performance expectations

The asset class proved not just resilient but performed beyond expectations in 2021. Nine in 10 investors stated their private debt investments met or exceeded performance benchmarks in the past 12 months – a considerably higher proportion than one year ago, when just two-thirds said the same. The figure of just 10 percent of investors reporting funds that fell below benchmark is the lowest since 2019, illustrating how well performance held up through the choppy two-year period of the pandemic.

Investors are less optimistic

Expectations of private credit remain good for 2022, though LPs are not as optimistic as in the past. Looking ahead, 21 percent of investors anticipate their private debt portfolio will exceed performance benchmarks in the next 12 months, a notable fall compared with last year’s study when 31 percent of investors shared this sentiment. Only one in 10 expect their private debt portfolio to fall below benchmarks next year, again down significantly on the 22 percent that expected poor performance back in 2020.

LPs to focus on direct lending

Allocations to direct lending will continue to rise this year, with 40 percent intending to increase their allocations to the strategy and 39 percent planning to invest the same amount as they did last year.

Meanwhile, 23 percent of LPs plan to invest less capital in distressed/special situations strategies in the next 12 months compared with the previous year. Venture debt and specialty finance are also garnering less interest from investors: almost half of private debt LPs do not invest in those strategies and only 16 percent plan to commit more to venture debt in the year ahead.

Falling appetite for secondaries

Although advisers continue to report a growing interest in the private credit secondaries market, the appetite to commit to secondaries funds in private debt appears to be dropping. Only 7 percent of LPs plan to commit capital to secondaries funds over the next 12 months, down from 15 percent in 2020.

More attention on fund manager relationships

There is a growing appetite among LPs to diversify their fund manager relationships during 2022, with almost two-thirds planning to increase their number of fund manager relationships, compared to just 44 percent who planned to do so two years ago. Despite this, there remains little appetite for new entrants, with half of LPs saying they do not invest in first-time managers, and only 5 percent more likely to invest in a first-time manager this year than they did last year.