Preqin: Sovereign Wealth Funds Increasingly Looking to Private Debt

Jun 10 2017 | 12:43am ET

Almost two-fifths of sovereign wealth funds are now actively investing into private debt, according to new research from data provider Preqin, and the proportion is growing.

Some 39% of sovereign wealth funds (SWFs) now invest in the asset class, up five percentage points over just the past 12 months, Preqin details in its 2017 Preqin Sovereign Wealth Fund Review. 

In fact, the majority of SWFs with more than $10 billion in assets now allocate to the asset class, including two-thirds of those managing $250 billion or more, and all of those managing $100-249 billion. 

Interest in private debt as a distinct asset class has soared in recent years, as investors are attracted to their attractive risk-adjusted returns and low correlations to other asset classes. 

Other key facts from Preqin’s Sovereign Wealth Fund Review: 

  • While only 17% of funds with less than $1 billion in AUM currently invest in the asset class, 67% of the largest funds 
with more than $250 billion are active investors. 

  • Private debt is sought after by non-commodity-funded sovereign funds. These investors make up 43% of sovereign wealth funds active in the asset class, despite comprising just 37% of the total sovereign wealth fund universe. 

  • Mezzanine investments are the private debt fund type most appealing to sovereign wealth funds, with 70% targeting the strategy over the next 12 months. 
  • Distressed debt is targeted by 63% of sovereign wealth funds active in the industry, while direct lending is sought by 53%. 

  • Sixty percent of sovereign wealth funds will target Europe in the next 12 months, ahead of 53% that will seek investments in North America. A significant 43% of funds are looking for opportunities in emerging markets. 

“This latest research shows that private debt is an increasingly attractive asset class to sovereign wealth funds,” said Ryan Flanders, head of private debt products for Preqin. “The five-percentage-point increase in the proportion of sovereign wealth funds investing in the asset class over the course of just 12 months reflects the positive investor sentiment towards the industry.”

“Sovereign wealth funds comprise some of the largest investors in private capital, so their increased participation in private debt is likely to have a significant impact on the future of the asset class. 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. At the same time, sovereign wealth funds’ ability to commit large sums of capital to vehicles may provide a further boost to future fundraising.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. More than 47,000 professionals in 90 nations use the company’s products.

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