Seventy per cent of all capital committed to private credit is from institutional investors, according to a recent report by the Alternative Credit Council and Dechert LLP.
Jiří Krόl, deputy chief executive officer of the Alternative Credit Council and the Alternative Investment Management Association, says that although private credit is a relatively new asset class, it has been embraced early by institutional investors because they have a familiarity with the underlying risk, it’s relatively simple and it started to grow at a time when fixed income yields were declining, making it an attractive option.
Read: Are investors becoming cautious around private debt?
“Credit fixed income investments is something people, hopefully, understand very well already,” says Krόl. “So it doesn’t take much in terms of additional education around what the strategy is trying to achieve and how it works. It’s relatively simpler to understand than, let’s say, complex trading strategies that use a lot of derivatives.”
When pension plans decide to invest in private credit there is a large education component, says Janet Rabovsky, partner at Ellement Consulting Group.
Pension plans must understand what kind of private credit they are interested in so that they can learn about the pros and cons of the various options. She also highlights the importance of understanding risks and that these are illiquid assets.
“You have to walk through all these different questions with them, so that they can figure out the role that it’s going to play in their portfolio,” she says.
Rabovsky also says that choosing the right manager is key.
“We won’t put money with someone who hasn’t actually invested through the last credit crisis because when the next one comes, and no one knows what’s going to trigger it, we want people who aren’t going to panic,” she says, highlighting that while the next crisis won’t be the same as the last, it is important to have a manager with a strategy to get through it gracefully with minimal or no losses.