As central banks gradually withdraw their support, private debt managers are preparing to step in and fill the gap.

Overall, fundraising by private debt funds has been on the rise in recent years, mainly due to the illiquidity premium offered by this type of fund and also due to the increase in the correlation of traditional assets, which makes alternative assets a good option for diversifying portfolios. Thus, the level of fundraising by private debt during the first half of 2021 has seen an unprecedented increase, reaching US$87 billion during that period and the creation of 108 funds across the globe.

On the other hand, there are two main reasons why the environment for raising this type of asset will continue to grow. First, credit needs will increase as economies gradually return to normal. The second reason is that there are no clear signs that the returns on public instruments will change significantly, as most economists believe that the high inflation rates currently being seen are a temporary phenomenon.

What role does US real estate debt play in all this?

Since 2018, in the US, it appears that both fundraising for this type of fund and the creation of new funds have slowed down. During 2018, 61 real estate debt funds were created and, in aggregate, raised a total of US$26bn, reaching their peak in both fundraising and fund creation. Then, during 2019 and 2020, an average of US$20 billion was raised annually and 38 and 32 funds were created, respectively, causing the average size per fund to grow from US$692 million to US$742 million during 2020. However, we see how large global managers have launched large funds in recent years, which shows the value that investors see in this type of asset.

In particular, the differentiating value provided by this type of asset is low volatility. Despite offering lower returns, they also exhibit less variation compared to the broader universe of private equity assets. This, combined with the low correlation between private debt assets and traditional assets, represents a great opportunity to diversify portfolios in search of lower volatility.

According to Oaktree, one of the world's leading alternative asset managers, there are several factors necessary for success in the world of private real estate debt. The first is the need for significant access to capital in order to finance sophisticated, high-quality deals. On the other hand, they talk about having a robust network of contacts in the industry—including banks, brokers, and sponsors—which is key to accessing a differentiated deal flow and securing attractive investment projects for investors.

In the current climate of uncertainty facing the country, and given the volatility of the domestic market, investing abroad is a very attractive alternative. If, in addition to this, you invest in strategies that have been offering attractive risk-adjusted returns, such as private debt and real estate funds, you can diversify your portfolios and obtain better returns.

Fynsa AGF

[1] Data from Preqin