Private debt is LPs’ best race horse

While private equity remains institutional investors' favourite asset class, with 34% looking to increase their capital allocation during the next 12 months, private debt outperformed the expectations of 90% of LPs.

The data comes from Preqin’s Investor Outlook: Alternative Assets, H2 2023, which collected responses from 178 LPs around the globe, breaking down their sentiment by asset class into private equity, venture capital, private debt, hedge funds, real estate, infrastructure and natural resources.

According to the report, 63% of respondents are allocating capital to the industry, and of those looking to deploy additional funds, 84% are looking to do so before the end of 2023. However, more than half (53%) of investors believe private equity is currently ‘overvalued’ and 25% expect the asset class to perform worse in the coming year compared to the previous one.

On the other hand, 53% of investors surveyed by Preqin hold the highest conviction for private debt’s continued strong performance, with 53% predicting another increase during the next 12 months. According to the survey findings, the asset class will see the biggest additional allocation of LPs’ capital in the coming year, with 45% of respondents affirming this.

Preqin names the current economic environment and concerns around lingering interest rates as reasons for the heightened interest in private debt. As per the report, 61% of surveyed investors name reliable income as the main reason for allocating capital to the asset class, with only 19% citing absolute returns as their primary motivator.

“Investors are striking a cautious tone as they await more certainty from the global economic picture,” says Cameron Joyce, SVP, head of private equity, research and insights at Preqin. “While they continue to tentatively increase allocations across private asset classes, returns expectations remain tempered following a challenging 12 months, and the appetite is firmer for more stable assets such as private debt.”

While private equity and private debt have fared well and, according to their backing LPs, will continue to do so, venture capital saw a decrease in capital allocations. According to the results of Preqin’s survey, 67% of respondents stated a decrease in their portfolio pricing and 68% of LPs think their VC portfolio is overvalued. Consequently, 76% of investors look to commit less than $50m to VC funds in the next 12 months.

On LPs’ overall sentiment towards private capital, Joyce comments: “There may be some light at the end of the tunnel. As confidence starts to grow that we are approaching or have already hit the bottom of the market, investors look set to continue to deploy capital to private assets throughout Q3 and Q4. Equity markets tend to be a lead indicator of investor sentiment, so if optimism continues to grow, we could see greater activation of capital deployed over the coming years.