Private debt investors eye asset-backed lending over the next year
New data has revealed that private debt investors are increasingly looking to asset-backed lending as the most promising emerging strategy over the next 12 months.
Preqin’s Investor Outlook for the second half of 2024 revealed that 58 per cent think asset-backed lending presents the best opportunities over the coming year, while private debt secondaries are gaining popularity, with 37 per cent of respondents telling Preqin they show the most promise.
However, direct lending remains the most favoured private debt strategy, with 70 per cent of respondents saying it presents the best opportunities. It has held the top spot since 2021.
Read more: Growing bifurcation between higher- and lower-risk private credit issuers
Special situations replaced distressed debt as the second most favoured strategy since last year’s survey, but Preqin vice president and head of private debt and fees RJ Joshua points out that the two strategies have some similarities and “have merely traded places”.
He noted that sentiment toward higher returning, higher risk, strategies such as distressed debt and mezzanine is down slightly compared to the previous year, implying that investors are becoming more risk averse.
“A key trend that we are watching closely is the steady gains in investor interest in open-ended funds,” said Joshua. “The clear majority of investors continue to favour the traditional pooled single-manager fund structure, with 58 per cent of respondents saying they are targeting this structure in the next 12 months.
“However, interest toward co-investments has markedly increased, from 19 per cent in June 2023 to 26 per cent this year, as well as open-ended structures, from 16 per cent to 23 per cent. Both structures benefit from allowing investors quicker exposure than traditional closed-ended funds, as they do not need to gradually draw down capital to build exposure, which may explain the increase in interest.”
Read more: Payment-in-kind income increasingly higher for funds
Overall, sentiment towards private debt remains exceptionally high, 50 per cent of respondents said they are looking to add capital to private debt in the next 12 months and 42 per cent said they will maintain their positions.
Reliable income is overwhelmingly the main reason for investors to allocate to private debt, cited by 58 per cent of respondents.
Diversification (57 per cent) and high risk-adjusted returns (44 per cent) were also cited as important. As many as 86 per cent of respondents said private debt had either met or exceeded expectations, although this down over the last 12 months, when the figure was 90 per cent.
Read more: Global private debt fundraising hits $50.4bn in Q2
