Family Office Allocations to Private Debt

Single family office are now consistently turning to private debt for uncorrelated returns and income.

Asset research group Preqin has demonstrated that volatile public markets, combined with low yields in a low-interest-rate environment, are leading family offices to seek out alternatives and they are now reliably committing around 10% of their investable funds to private debt. The industry saw AuM reach a record high of $638bn by end June 2017 and anecdotally, Family Offices in London tell me their appetite for private debt is high.

The wider context is that banks have been forced to retrench their lending operations, and an array of investors have stepped into the resulting breach. Private debt providers act much like merchant banks used to operate, making loans to businesses too small to go to the bond market. It’s a business model which marries the corporate need for funding with family office desires for higher returns at a time interest rates are at historic lows.

The growing popularity of private credit is not limited to funds. In the broadest sense it includes investing in lending, whether via sole led deals, club deals or co-investments, specialist investment trusts, Peer2Peer platforms, syndicated loans, private placement notes and other illiquid but tradable instruments.

Its attractiveness lies primarily in the strength of its risk-adjusted return. As an alternative asset it offers diversification and steady cash flows, it is also uncorrelated to equity markets whilst generating a significantly higher yield than the traditional fixed-income markets. Whereas annual yields on publicly traded corporate bonds currently generate yields of two to five percent, typical interest rates for private credit transactions often double this.

Like all industries it faces its challenges. Preqin reports half of Private debt fund managers say valuations are an ongoing issue, 31 per cent cite deal flow, 27 per cent highlight fee pressure and 3 per cent due diligence on their lending. Yet optimism remains high and Preqin’s December 2017 investor reports showed that 54% of private debt investors were looking to increase their allocation to the asset class over the longer term, with a further 44% looking to maintain their current allocation.

The continued popularity of private debt will make it a focus of The Family Office Council investment calendar in 2018.