Most sovereign wealth funds plan to ramp up private credit allocation

Two-thirds of sovereign wealth funds (SWFs) plan to increase their allocation to private credit in the coming year, with diversification from fixed income and relative value against conventional debt cited as key attractions.

Invesco’s annual global sovereign asset management study found that private credit is now a widely adopted strategy among SWFs, with 56 per cent of respondents participating through fund investments and 30 per cent engaging directly or via co-investments.

SWFs are looking to invest even more into private credit in the coming year, primarily reallocating capital from fixed income (34 per cent), public equities (26 per cent) and private equity (24 per cent).

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Invesco surveyed 140 senior investment professionals representing 83 SWFs and 57 central banks, who collectively oversee $22tn (£17tn) in assets under management.

There are a number of reasons why SWFs are increasingly interested in private credit. Diversification from traditional fixed income sectors was cited by 63 per cent of respondents, followed by relative value against conventional debt (53 per cent).

The high income component of private credit investment was cited by 59 per cent of those surveyed, followed by the ability to influence deal structure and protections (37 per cent).

Access to floating rate assets and niche markets were also seen as benefits of private credit, as well as direct origination capabilities.

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The strong performance of private credit investments has also boosted interest in the asset class. More than a third of SWFs that have invested in private credit said that returns have exceeded their expectations.

However, SWFs also recognised the challenges of investing in private debt.

Finding high-quality opportunities in a competitive market was cited as a hurdle by 78 per cent of respondents, followed by aligning interests with partners (47 per cent) and pricing (44 per cent).

As a result, many SWFs are establishing their own internal private credit teams and forming strategic partnerships with private credit managers to secure the best deals, the report said.

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Rod Ringrow, head of official institutions at Invesco, said that private credit presents a “compelling opportunity for SWFs.”

“Over half of SWFs are now investing in private credit, with most planning to increase allocations,” he added. “Infrastructure debt, real estate debt, and corporate lending are favoured sectors. SWFs are also exploring emerging markets and are increasingly attracted to mezzanine debt and preferred equity in real estate.

“Amid growing competition, funds are balancing defensive and opportunistic strategies, utilising both external managers and specialised internal teams.”