BSP: "51% of Global Institutional Investors Plan to Expand Alternative Credit Investments"

BSP survey of institutional investors
92% plan to expand or maintain alternative credit allocation
Strong preference for infrastructure debt

More than 90% of institutional investors (LPs) worldwide plan to expand or maintain their allocation to alternative credit. Demand for diversification across regions and credit sub-asset classes was also found to be strong.

On February 12, 51% of institutional investors who responded to a recent survey by Benefit Street Partners (BSP), an alternative credit manager under Franklin Templeton, said they plan to increase their allocation to alternative credit. Another 41% said they intend to maintain their current allocation.

The survey was conducted with 135 investment professionals at institutional investors such as pension funds, mutual aid associations, and insurance companies across North America, Europe, the Middle East and Africa (EMEA), and the Asia-Pacific (APAC) region. The total assets managed by these institutions amounted to 8 trillion dollars. The results showed that as alternative credit has established itself as a core asset in institutional portfolios, LPs' investment approaches are becoming more sophisticated.

The main reasons cited for expanding alternative credit investments were portfolio diversification benefits (85%) and expectations for higher total returns compared with traditional bonds (81%). In particular, investors who already have a significant allocation to alternative credit were more likely to pursue additional allocations.

Among investors planning to increase their alternative credit exposure, 47% said they would raise their allocation to infrastructure debt. This was followed by direct lending (39%), asset-based lending (35%), special situations (30%), and commercial real estate debt (28%). These preferences reflect their risk-adjusted return outlook over the next three years, with infrastructure debt being cited as the most promising opportunity with a response rate of 53%.

LPs were generally optimistic about the impact of macroeconomic factors on their alternative credit portfolios. A total of 47% of respondents viewed the current interest rate outlook as a positive performance opportunity, exceeding the 23% who saw it as a source of concern.

A similar pattern appeared regarding market volatility. While 44% viewed it positively, only 20% had a negative assessment. In addition, only 5% of respondents saw the environment for mergers and acquisitions (M&A) and leveraged buyouts (LBOs) as challenging from a performance perspective, whereas 45% assessed it as attractive.

The United States, which accounts for 65% of global alternative credit assets, remains the largest market and has continued to serve as the main destination for new capital inflows over the past 12 months. Last year, 34% of global investors increased their allocation to U.S. alternative credit, followed by Europe (27%), Asia-Pacific (APAC) (26%), and emerging markets (22%).

Meanwhile, as geographic allocations are being reshaped, a stronger "home bias" has emerged among investors in Europe and APAC. Over the past year in Europe, 51% of investors increased their allocation to European assets, while only 21% expanded their U.S. exposure. In APAC, 34% increased their investments within the region, a figure slightly lower than the 37% who increased their U.S. allocation. However, considering the relatively small size of the APAC alternative credit market, this is a noteworthy number.

According to BSP's survey, preference for more flexible fund structures is spreading rapidly. Currently, 71% of investors use traditional closed-end funds, but this proportion is expected to fall to 59% over the next 12 months.

By contrast, the share of respondents using evergreen (open-ended, without maturity) funds is projected to rise from 33% to 42%, while the use of separately managed accounts (SMAs) and fund-of-funds (FoF) structures is expected to grow from 34% to 40%.

In terms of structural changes, the boundary between public credit and private credit is gradually blurring. At present, 64% of LPs manage the two asset classes separately, but this share is expected to drop to 41% in five years. Over the same period, the proportion of those taking an integrated approach is projected to increase from 30% to 40%.

However, the share of respondents expecting full integration is projected to rise only from 5% now to 19% in five years. The liquidity gap between public credit and private credit was cited as the biggest obstacle to full integration, with 65% of LPs identifying it as a key constraint.

Allison Davi, BSP Co-Chief Operating Officer (Co-COO), said, "As most global investors anticipate expanding their alternative credit allocations, portfolio construction is also becoming more sophisticated. Investors are seeking broader diversification across product types, investment regions, and fund structures, and they are increasingly looking to build long-term, in-depth relationships with asset managers to achieve this."

She continued, "Not all managers have the same competitive edge in this environment. Managers that can secure sufficient scale, demonstrate a proven track record as specialized credit managers, and show capabilities across a wide range of sub-asset classes, while also offering a flexible, innovative, and client-centric approach, will be the ones to gain a competitive advantage."

She added, "In a market where the boundary between public and private credit is gradually breaking down, the combination of these factors provides a more effective foundation for generating alpha for investors. BSP is pursuing such strategies through group-level collaboration with Franklin Templeton."

This content was produced with the assistance of AI translation services.