This is the strategy private debt investors are favouring

Report highlights higher-risk option is preferred

This is the strategy private debt investors are favouring
Steve Randall

Private debt investors are opting to take a higher-risk strategy with distressed debt seeing increased activity.

In the year from Q1 2017 to Q1 2018, more than half of private debt investors chose distressed debt vehicles, while special situations were also in favour.

A report from industry analysts Preqin reveals that around half of private debt investors believe equity markets are reaching their peak, and an increasing share believe a correction is imminent.

“We are seeing an increasing number of investors turn to private debt, driven in part by the great success the asset class has seen in recent years. While the total number of active investors has grown by over 100 in just the past quarter, the universe remains dominated by a small group of the most influential institutions: the 10 largest investors alone account for close to 30% of aggregate capital flowing into the asset class,” said Preqin’s head of private debt products Tom Carr.

The stats
There are more than 3,200 investors active in private debt. The 10 largest investors have a total allocation of $71bn to the asset class, almost 30% of aggregate capital allocated to private debt.

52% of these investors chose distressed debt in Q1 2018, up from 46% a year earlier. Meanwhile, mezzanine vehicles were sought by 46% in Q1 2018, down from 51% a year earlier.

45% of hedge fund investors say equity markets may have peaked.

“As the Preqin H1 2018 Investor Outlook noted, investors across different asset classes increasingly feel that public markets are at or close to a peak, and may be due for a correction,” added Carr. “In this context, the appeal of higher-risk strategies like distressed debt and special situations is growing: a potential market correction would provide increased opportunities for these fund types to capitalise on. This may be why we have seen distressed debt overtake direct lending as the most sought-after strategy, while appetite for special situations funds has grown further than for any other fund type.”