AI view: the alternative asset class to watch
AsianInvestor’s editorial team set out this month to answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.
Here we present our response to the final question, which focuses on alternative assets. Our earlier predictions are available by clicking on the picture below. The feature appears in full in the February issue of AsianInvestor magazine.
Question 10: Which will be the best performing alternative asset class on a risk-adjusted basis?
Answer: Private debt
Few would dispute that prospects for private debt look especially strong this year. Demand continues to grow for financing from sources other than banks, which have been compelled by regulators to shrink their balance sheets and, as a consequence, curb their lending.
Moreover, expected further US interest rate rises are not expected to have a significant near-term impact on private debt, given that base-rate floors are already incorporated into pricing.
Private debt ticks important boxes in the present environment: it combines relatively high expected risk-adjusted returns, low volatility, a lack of mark-to-market issues, and a high predictability with regard to returns and cash flows.
Accordingly, investor confidence is high. The majority (63%) of respondents to a Preqin survey last August said they planned to commit capital to direct lending strategies in the following 12 months.
More than half also reckoned that private debt would outperform relative to corresponding public debt in the event of an adverse event in the credit markets.
A key leading indicator of continued demand for private debt is the level of global private equity dry powder, which hit an all-time high of $1.3 trillion as of September 30 and up 11% from the end of 2014, by Preqin data.
Direct lending has risks: witness the numerous reports of failed or fraudulent peer-to-peer lenders in China. But the current market environment looks well suited for private financing to thrive.