Fearing sell-offs and a British exit from the European Union, UK investors are turning to private debt in search of secure returns.
“Investors are increasingly turning to asset classes with illiquidity premiums and lower correlations to listed markets.”According to a survey by consultancy firm bfinance, investments in private debt are viewed as one of the best potential sources of returns in 2016, with 77% of investors in favor of increasing allocations to the asset class. The survey’s respondents included private and public pension funds and insurance companies with assets under management totaling £70 billion ($102 billion).
“The responses reflect conversations we are having with investors who are increasingly turning to asset classes with illiquidity premiums and lower correlations to listed markets,” said Sam Gervaise-Jones, head of client consulting in UK and Ireland at bfinance.
Private debt’s low correlations with other asset classes were seen as particularly favorable in light of fears of a simultaneous equity/bond sell-off, which 50% of respondents cited as their biggest worry. Other concerns included a continued slowdown in equity markets and geopolitical unrest.
On top of those issues, 85% of investors predicted that a Brexit would negatively impact the UK economy.
“These findings are a telling sign of the cautious mood among UK institutional investors, with asset owners across public and private funds concerned about how to protect returns and above all their assets,” said Gervaise-Jones.
But while a majority of investors predicted private debt would be the highest returning asset class over the next 12 months, they said accessing the best assets at good prices would be challenging. Other obstacles to private debt investments were smooth deal flow and modeling risk in an illiquid market.
“It is essential to source the right opportunities in private debt, for which careful manager selection and negotiation of terms with managers is paramount,” said Gervaise-Jones.
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