Preqin’s Private Debt Online database tracks 217 US-based foundations with a preference for private debt funds, which hold approximately $280bn in aggregate assets under management (AUM). These foundations have an average current allocation to private debt of 4.9% and represent a significant sum of capital allocated to the asset class – but where is this capital being allocated to and which strategies have these investors specifically been targeting?
Distressed debt is the most favoured private debt strategy among US-based foundations, targeted by three-quarters of the investor population, followed by mezzanine vehicles (53%). These fund types are established among foundations investing in private debt, with some of the largest foundations investing in both distressed debt and mezzanine funds, such as Bill & Melinda Gates Foundation Trust, Ford Foundation and Robert Wood Johnson Foundation. Nonetheless, although direct lending is an area which has attracted considerable interest among a number of investors in recent years, only 26% of US-based foundations are currently open to investing in the fund type.
In terms of regional preferences, nearly all (96%) US-based foundations will make private debt investments domestically. The majority (67%) of foundations will invest in Europe-focused funds, while 56% will invest in funds targeting private debt in Asia. Forty-one percent of US-based foundations are open to investing in funds focused on emerging markets.
The preferences of US-based foundations for distressed debt and mezzanine investments in the developed markets will likely be beneficial to fund managers operating in and targeting these regions. Conversely, while fundraising for direct lending was successful in 2015 (44 funds raised an aggregate $32.7bn), the strategy has had less traction among US-based foundations. Fund managers may need to explain the potential benefits of their funds more clearly in order to gain access to capital from these investors.