There are many different types of alternative investments available to professional investors, ranging from private equity, to hedge funds to real estate.
The alternative investments funds industry is not new, particularly when you consider that real estate has been around for decades.
Alternative investments are often favoured because they offer investors diversification away from core strategies in the equity or bond markets. For example, hedge funds provide different approaches to managing a range of liquid assets, while private equity funds provide exposure to unlisted companies.
Private debt funds have occupied the middle ground between hedge funds and private equity for many years. On the one hand, they offer the same diversification from bond investments combined with the potentially superior yields to mainstream fixed income, while on the other, private debt funds are frequently structured as closed ended vehicles, like private equity.
This is not always the case, of course, and private debt funds are also available with the same liquidity terms as hedge funds.
Over the last 20 years alternative investments have been subject to several positive trends, which have also affected the private debt fund management industry.
Funds and their managers have become better regulated and have embraced a higher level of transparency and improved their reporting standards. Governance has also been enhanced in most of the main fund jurisdictions, where regulators have pushed for better oversight from fund boards, and more accountability to investors.
Alternative investment funds have also become more institutional in the way they are managed and operated. This has manifested in several ways, including efforts to reduce operational risk, further investment in technology, and changes to the ways they interact with key service providers like fund administrators.
Institutional investors have rightly expected alternative investments to conform to the same high reporting standards that the vanilla fund industry is required to meet, and alternative investment funds have moved to meet these.
Private debt now stands as its own asset class, distinct from other alternative investments, thanks to recognition of its additional diversification benefits when compared to its cousins in the world of hedge funds or private equity. Investors are more aware of how private debt’s risk / return characteristics and alpha-generation techniques differ. Fund raises and deal ticket sizes have increased correspondingly.
Private debt as an alternative investment industry has increased in size and importance. One such example is the size of the non-banked direct lending market which has expanded over the past decade. This has created a much larger global market for SME business lending or specialist project or trade finance in which fewer large banks now participate.
Private debt is becoming more diverse with different funds focusing on specific parts of the lending market, or different geographies. It is demonstrably as specialist an alternative investment sector as hedge funds, requiring the attention of investment and credit teams who understand the companies and projects they are lending to.
Investors considering private debt now have a much wider choice when it comes to strategies, finance segments and geographies than ever before.
Further reading
AIMA Journal 30th Anniversary Edition