A recent report from the Alternative Credit Council and global law firm Dechert LLP provides new insights into the private credit market, which is valued at $1.5trn. The study, titled “In Partnership: Trends in Private Credit Fund Structuring,” identifies three key trends that are shaping the sector: increasing demand for customised investment options, growing interest in hybrid and evergreen funds, and the expanding role of retail capital.
Customisation is key
The survey polled managers looking after some $800bn in assets under management. It found that a hefty 80% of private credit managers employ a mix of commingled funds and other investment vehicles. Strikingly, 95% of firms offer bespoke managed accounts designed for single investors. Furthermore, the research anticipates a surge in investor demand for co-investment, with 69% of respondents predicting an uptick.
While crafting such customised options incurs additional costs, the report underscores that managers view this strategy as essential, particularly as investors are increasingly seeking specialised ways to tap into private credit.
Hybrid and evergreen funds gain traction
The research also indicated that hybrid or evergreen funds are gaining attention, as these funds offer some liquidity options to investors. According to the data from the ACC and Dechert, 51% of the managers surveyed offer funds that provide some form of redemption rights. Additionally, 48% of the respondents expect an increase in demand for liquidity in 2023.
These hybrid or evergreen structures offer advantages such as more efficient capital raising and allocation, along with giving investors more control over how their capital is deployed.
Leverage in investment strategy
Another significant revelation from the research is the role of leverage in shaping investment strategies.
A substantial 66% of the respondents said they use leverage in their strategies. Moreover, 41% offer both levered and unlevered investment sleeves within their private credit funds, and another 12% are contemplating offering such flexibility in upcoming fundraising efforts.
Retail capital’s growing role
Significantly, the research highlights a growing trend of sourcing capital from retail investors. While 41% of respondents already include retail clients in their portfolios, an even more noteworthy 66% are considering this for their future offerings. This suggests that an additional 25% of fund managers may be looking to target individual investors going forward.
To facilitate this, firms are focusing primarily on high-net-worth individuals and semi-professional retail investors.
Despite facing operational challenges, particularly in marketing and distribution, new vehicles like the European long-term investment fund (Eltif) and the UK long term asset fund (Ltaf) are expected to fuel retail participation across Europe.
Luxembourg’s growing appeal
Focusing on fund domiciles, the study found that 59% of respondents have funds based in either Luxembourg or the Cayman Islands. Nearly half (48%) are using the Luxembourg Reserved Alternative Investment Fund (Raif) structure for investing in EU-based private credit assets. This surge, according to the authors of the study, indicates the role of factors such as familiarity, cost-effectiveness and service provider capabilities in driving domicile choices, particularly for funds investing in EU-based assets.
Jiří Król, global head of the ACC, highlighted the transformative role of private credit in today’s volatile markets. “Private credit is a permanent fixture in the allocation models of many global investors. Customised structures play an important role in accommodating this demand for ongoing exposure to private credit strategies and ensures that investors can tailor exposure according to their risk appetite,” he concluded.
Matthias Kerbusch, a partner at Dechert based in Luxembourg, stated, “The results of the study confirm that, given its very flexible regulatory environment and the resulting fund structuring options, Luxembourg continues to be a leading location for credit funds (and other alternative investment strategies).”
The full research by ACC and Dechert, released on 15 September, is available here.