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

Overall, fundraising by private debt funds has been on the rise in recent years, primarily due to the illiquidity premium offered by this asset class and also because of the increased correlation among traditional assets, which makes alternative assets an attractive option for portfolio diversification. Consequently, fundraising by private debt funds during the first half of 2021 reached an all-time high[1], totaling US$87 billion during that period and resulting in the creation of 108 funds worldwide.

On the other hand, there are two main reasons why the environment for the collection of these types of assets is likely to continue growing. First, credit needs will increase as economies gradually return to normal. The second reason is that there are no clear signs that yields on government securities will change significantly, since most economists believe that the high inflation rates currently being observed are a temporary phenomenon.

What role does U.S. real estate debt play in all of this?

Since 2018, in the U.S., it appears that both fundraising by these types of funds and the creation of new funds have been slowing down. In 2018, 61 real estate debt funds were created, and collectively, they raised a total of US$26bn, reaching their peak in both fundraising and fund creation. Then, during 2019 and 2020, an average of US$20bn was raised annually, and 38 and 32 funds were launched, respectively, causing the average fund size to grow from US$692MM to US$742MM during 2020. However, we see that major global fund managers have launched large-scale funds in recent years, which demonstrates the value that investors place on this type of asset.

In particular, the key differentiating factor offered by these types of assets is low volatility. Although they generate lower returns, they also exhibit less fluctuation compared to the broader universe of private equity assets. This, combined with the low correlation between private debt assets and traditional assets, presents a significant opportunity to diversify portfolios in pursuit of lower volatility.

According to Oaktree, one of the world’s leading alternative asset managers, there are several factors necessary for success in the real estate private debt sector. The first is the need for significant access to capital in order to finance sophisticated, high-quality deals. Additionally, they emphasize the importance of having a robust network of industry contacts—including banks, brokers, and sponsors—which is key to gaining access to a distinctive deal flow and securing investment projects that are attractive to investors.

Given the current climate of uncertainty the country is facing and the volatility of the domestic market, investing abroad is a very attractive option. If, in addition, investors focus on strategies that have consistently delivered attractive risk-adjusted returns—such as private debt and real estate funds—they can diversify their portfolios and achieve better returns.

Fynsa AGF

[1] Data from Preqin