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More SWFs take to private debt but capital-raising levels off

The number of sovereign wealth funds (SWFs) investing in private debt rose five percentage points over the last 12 months to 39%, although the amount of new money invested ticked lower.

Research from alternative investments data firm Preqin showed most SWFs with more than $10bn (€8.9bn) in assets now allocate to private debt, and two-thirds of those managing $250bn or more do so.

All larger SWFs – those managing $100bn to $249bn – invest in the asset class, according to research for the 2017 Preqin Sovereign Wealth Fund Review.

Preqin said SWFs were attracted to private debt investments due to their strong risk-adjusted returns and low correlation to other asset classes.

Although the proportion of sovereign funds allocating to private debt increased, the amount of money being invested in the asset class did not.

Capital raised for private debt funds closed in 2016 totalled $94bn, Preqin said in its report, down from $98bn in 2015. However, this was still almost quadruple the $25bn raised in 2009.

Ryan Flanders, head of private debt products at Preqin, said: “This latest research shows that private debt is an increasingly attractive asset class to sovereign wealth funds.”

SWFs’ ability to commit large sums of capital to private debt vehicles could give a further boost to future fundraising for asset managers, he said.

However, as a group these investors could tend more towards the direct investment route in future, he suggested.

“Given their overall tendency to prefer longer-term, lower-risk investments, as more sovereign wealth funds become active in the space we may see a swing towards direct lending investments,” Flanders said.

Preqin said 93% of private debt investors interviewed at the end of 2016 said their private debt portfolio had either met or exceeded their expectations in the past year.

Among private debt strategies, mezzanine funds were the most popular strategy, with 70% of sovereign funds invested in private debt picking this as a preferred strategy. Distressed debt was selected by 63% and direct lending by 53%.

“Private debt, amid a low interest rate environment, has become a distinct, standalone asset class rapidly evolving into a mainstream investment option for institutional investors,” Preqin said in its report.

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