Investors set to raise alternative credit exposure: survey

Prospects of rising interest rates could drive increased allocations, research from NN IP shows.

Institutional investors are planning to increase their exposure to alternative credit this year, new research from NN Investment Partners (NN IP) shows.

A survey of 100 international institutional investors conducted last December shows their intention to turn to alternative credit, as an expected increase in interest rates could create challenges for traditional fixed income asset classes.

Within the real estate market, increased investor demand for debt fuelled more than $10 billion of fundraising for private real estate debt vehicles focused on Europe, Real Estate Capital data show.

NN IP’s research reveals that 94 percent of investors expect the Federal Funds rate will rise over the next 12 months – 61 percent anticipate an increase of 0.5 percent or more. In addition, 69 percent believe that quantitative easing in Europe will end by 2019 and there will be controlled rate rises. If this happens, 37 percent of investors say they would increase their exposure to alternative credit, higher than any other fixed income asset class.

Over the next 12 months, 14 percent of institutional investors anticipate they will start investing in alternative credit for the first time, and 45 percent who already invest in this asset class intend to increase their exposure.

Despite growing demand for alternative credit as an asset class, when asked about their understanding of the opportunities in alternative credit, only one in three investors said they were completely aware of them.

One in five investors said the biggest obstacles to investing in alternative credit is understanding the return versus risk dynamic of opportunities involved. The survey shows alternative credit is perceived as a complex asset class to navigate between different propositions.

Additional major obstacles highlighted by investors include the lack of data and information on the asset class, a lack of understanding in how to treat it from a regulatory or accounting point of view and how to incorporate it into overall asset allocation strategies. All three points are cited by 9 percent of institutional investors.

“Investors are increasingly looking to increase their exposure here to generate better risk-adjusted returns, diversify their portfolios and obtain access to ESG related credit exposure,” said Gabriella Kindert head of the Alternative Credit Boutique at NN IP.

“In 2017, we saw a 33 percent increase in flows into our alternative credit strategies when compared to 2016.”