As we progress into Q1 of 2017, the investment market appears strong, with plenty of new areas of investment emerging despite the unprecedented political, economic and social factors of 2016. With this in mind, we have taken a predictive look at how the market may perform and change over the next 12 months by considering four key areas:
1) Distressed debt
Distressed debt is still a key credit space for managers, with the HFR Distressed Index up 13.4% year-on-year. Many believe that the new Trump administration could herald new opportunities in the months ahead1. With interest in energy and MLPs predicted to decline this year, other sectors such as retail and healthcare may offer the most lucrative opportunities moving forward, with the expected repeal of the Affordable Care Act significantly impacting the latter.
Research by HFR shows returns of 12% in 2016, meaning these distressed strategies are now significantly outperforming many other hedge fund sectors. CEO of LNG Capital, Louis Gargour, believes distressed strategies could present good returns across Europe this year, and echoed this positive sentiment in a recent interview with HFM Global. “I think given the sterling’s move against the euro and the dollar that some retailers will begin to have liquidity problems,” he predicted. “The margins are tight, it is a very competitive environment and I think opportunities will present themselves with firms going bankrupt in Europe.”
2) Emerging markets
The HFRI Emerging Market Index was up by 7% in November 2016 – a marked increase on the global sector, which achieved 5.5% – and, as such, new players are beginning to emerge. Latin America – up 26% year-on-year4 – stands out as a contender, with other markets such as Argentina and Brazil likely to follow suit, helped in part by their political and economical evolution. Other opportunities are being explored in Indonesia, South Africa and Russia as well. In contrast, a Credit Suisse emerging markets specialist declared Asia to be the least attractive region4.
3) New launches
One distinctly positive trend in the credit space right now is the number of new launches in the sector over the last 12 months. The 42% decline in start-ups in 2016 has been replaced with renewed appetite for credit this year. The accountancy firm EisenerAmper suggests that credit funds now account for between 40% and 50% of new launch activity.4 Asset managers are starting to chase yield in areas unrelated to public securities, and although investment strategies are still prioritizing distressed debt, there is also an uptake in areas such as mezzanine debt.
4) Private debt, Looking back to 2016…
Private debt was on the decline in recent years, with 22% less allocated into these funds by investors in 2016 compared to 2015, according to figures from Preqin2. This translated to a total capital-raise of $74bn compared to the $96bn closed the previous year. It also appeared the pace of the market was slowing down in 2016, with funds advertised to investors for 20 months compared to the usual 16-month lifespan we saw in 2015.
This has been a US-led market with nearly three-quarters (70%) of those investing in private debt based in North America, and just 23% based in Europe. Private sector pension funds, which include funds such as TIAA, were the greatest investors in private debt, with 23% of capital in this space. This was closely followed by public pensions (21%), foundations (13%) and endowments (12%).
Investors were increasingly reliant on a small pool of experienced managers, with the top ten private debt funds representing 47% of the market – equating to $36bn of capital.
Looking forward to 2017…
Growth is on the horizon for private debt in 2017. According to research from Preqin, more than half (57%) of investors are planning to increase their private debt allocations over the next 12 months3 with two-thirds hoping to increase their exposure to this investment area in the long-term.
Around a third of asset managers are expected to maintain their current exposure to this area, with only 11% suggesting they will deploy less capital in this space over the next 12 months.
Private credit and alternative financing are experiencing a surge in interest at present as the prominence of banks in the market declines. BNP Paribas, Deutsche and AllianzGI are all in the process of developing offerings, while Man Group has already established a Global Private Markets unit1.
These predictions follow an encouraging start for private debt in 2017, with 27% of allocators indicating this area of their portfolios exceeded their expectations in 2016, compared to 18% in 20153.
The institutional investor community has been increasingly attracted to private debt funds over the past few years and its continuing strong performance will bolster this trend for commitment to the asset class for the next 12 months and beyond.
To learn more about these trends, and how Selby Jennings can support your recruitment efforts in this market, please get in touch today.
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