Private debt favourite asset class for next 10 years
Private debt is the asset class most preferred by institutional money allocators for returns over the next 10 years, according to a survey by Cliffwater, alongside private equity.
Based upon a survey of 14 of the largest allocators and advisers, public equity and private real estate will lose out to private debt, which “should expect continued inflows”.
Private debt’s 8.46 per cent consensus expected 10-year return is second only to 9.22 per cent for private equity in Cliffwater’s analysis.
“These consensus forecasts will continue to push the wealth channel to increase their growing alternatives allocations to both private equity and private debt, particularly through evergreen fund structures,” said Stephen L. Nesbitt, chief executive of Cliffwater.
“Institutional investors, who already have double-digit allocations to private equity, will likely focus on increasing their private debt allocations,” he added.
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The findings follow an update by allocators of their 2025 asset class return and risk assumptions covering the next 10 years.
These large institutional players direct monies to asset classes based upon long-term expected returns, risk, and correlations, collectively known as capital market assumptions, or CMAs.
The recent emergence of private debt in asset allocation discussions was made possible by indexes like the Cliffwater Direct Lending Index that provide a historical record of private debt return and risk, which in turn assists allocators in developing CMAs for that asset class.
“Allocators evidently like what they see, both historically and prospectively”, about private debt, said Nesbitt.
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At the same time real estate allocations will likely decline judging from their low 6.13 per cent consensus expected return, a full 2.33% below private debt with roughly the same risk level, he pointed out.
Cliffwater risk assumptions for private debt and private equity are below the consensus average.
“We believe risk assumptions underlying the consensus are unnecessarily inflated by allocators using public asset proxies for private assets when estimating risk,” said Nesbitt.
Consensus private debt and equity expected returns are approximately two per cent above equivalent public asset classes. Cliffwater private debt and private equity expected returns at approximately three per cent above equivalent public asset classes.
Unlike the consensus, Cliffwater forecasts high US stock returns compared to non-US stocks.
Read more: Private debt fundraising slumped in 2024
