Investors are increasingly favouring real asset debt over more traditional private debt lending to companies, according to a report by investment consultant bfinance.
The report said searches conducted on behalf of investors for real asset debt outweighed searches for corporate private debt in dollar terms in 2019 for the first time.
Fundraising data from sister publication PDI recorded a fall in private debt fundraising during 2019 from $166 billion to $147 billion. However, the decline is largely due to corporate debt funds, which fell 17 percent, while infrastructure debt fundraising increased from $9 billion to $14 billion and real estate debt fundraising held relatively steady at $27 billion.
New investors are also entering the real asset debt sector, according to bfinance, with defined contribution pension schemes making their first investments in illiquid strategies, such as the UK’s Nest pension scheme making infrastructure and real estate debt commitments last year. Insurance companies are also moving into the asset class as regulatory changes have improved the treatment of infrastructure debt.
Bfinance said the current appetite among investors spans a broad risk-return spectrum, from senior infrastructure debt yielding between 3 and 5 percent up to mezzanine real estate debt with a yield of up to 13 percent.
An established pattern of firms shifting into low-risk senior private debt strategies as a replacement for investment-grade fixed income is continuing, according to the report, but many investors in real estate and infrastructure equity are now shifting towards debt at higher risk-return levels.
While real estate debt has already benefited from these trends for some years, bfinance said infrastructure debt is now emerging as a space in its own right as infrastructure mezzanine funds are offering returns of close to core/core-plus infrastructure equity.
It added that investors with lower risk profiles, particularly among pension funds and insurers, who are seeking to replace their investments in fixed income could find real assets debt can fill a gap in their portfolios.