Private credit allocations rising as investors seek diversification

The private credit market is gaining traction as investors across the spectrum seek better returns and greater diversification.

A new report from private credit platform Percent and Coalition Greenwich shows that 63% of respondents – largely asset managers, hedge funds and wealth managers in family offices and RIAs – plan to increase private credit allocations. Half have increased their exposure in the past year.

Diversification is a key driver of allocations to private credit (71% said so) especially among financial advisors whose clients want alternatives to public equity and fixed-income options. The second-most-cited reason for increased allocations is income generation.

With predictions that these assets will outperform U.S. government and corporate bonds (by 70%), commercial real estate (by 62%) and residential real estate (by 44%) with yields over 10%.

“The combination of the rising interest rates and the banking crisis this year made it almost impossible for small and mid-sized corporate borrowers to get the funding they need, creating an increased spotlight on private credit,” said Nelson Chu, founder, and CEO of Percent. “The study reinforces the trends we’ve seen on our platform, further emphasizing how the yields within the private markets are proving to be incredibly attractive.”

BARRIERS TO INVESTING

However, 57% of the family offices participating said more easily accessible data on private credit investments is needed, with 72% of asset managers and 67% of RIAs agreeing. Most respondents indicated a reliance on data provided by the managers they invest with (78%), indicating a need for more data standardization.

Liquidity is another major concern with 70% citing this as a barrier to private asset investing, along with high manager fees (56%), less transparency and regulation compared to public markets (38%), and difficulty in sourcing investment opportunities (30%) among others.

“The private credit market offers investors more opportunities to generate income higher than obtained in the public market, often with a similar risk profile,” said Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology. “While typically favored by the larger investors such as KKR and Blackstone, we’re now seeing unconventional private credit investors entering this asset class at an unprecedented volume.”