Sovereign wealth funds plan increased allocations to private credit – Invesco

July 23, 2024 (Preqin News) – Over two-thirds of sovereign wealth funds (SWFs) plan to increase their allocations to private credit, according to Invesco’s Global Sovereign Asset Management Study 2024.

The report finds that the changing macro environment drives interest toward equities and private credit. Over half of SWFs (56%) now invest in private credit and 69% plan to increase their allocations significantly or moderately. The increased allocations to private credit are not being financed from a single source, with 34% coming from fixed income, 26% from public equities, 24% from private equity, and 16% from other sources.

The benefits that drive private credit’s appeal for SWFs are varied, but the most selected are diversification (63%), private credit’s relative value against traditional debt (53%), its high-income component (49%), its ability to influence deal structure and protections (37%), and access to floating rates (also 37%).

Private credit performance was also attractive, with just 5% of SWFs saying their returns since they started investing in the asset class were worse than expected. Within private credit sectors, SWFs are most interested in infrastructure debt (51% selected it as “very attractive”), real estate debt (50%), and corporate lending (29%).

Concerns within private credit investments include finding high-quality opportunities (78% selected this as one of the main challenges), aligning interests with partners (47%), and valuation and pricing (44%).

There is also growing interest in the opportunities presented by emerging markets, as 21% of SWFs see greater opportunities there, and 29% of investors see an equal chance in emerging and developed markets.

Within alternatives, private equity allocations dropped from 7.4% to 7.0% of portfolios from 2023 to 2024, and real estate allocations saw a fall from 8.0% to 7.6%. However, infrastructure rose from 7.1% to 7.7% and hedge funds/absolute return funds increased from 2.5% to 2.9% over the same period.

Invesco surveyed 140 investment professionals representing 83 sovereign wealth funds and 57 central banks, who oversee roughly $22tn in assets under management (AUM).

As SWFs are growing larger and more sophisticated, their AUM as defined and tracked by Preqin, has risen to $10.4tn as of March 2023, up by 19% from December 2021. With low liquidity needs and a long investment horizon, SWF investment goals are well-matched with alternative investments.

The report also revealed that 27% of SWFs and central banks are making some use of AI in their investment processes, and 6% are employing it extensively. The rise of generative AI has changed the stance of two-thirds of SWFs, who are either still evaluating the implications or have actively changed their AI strategy. The most common uses for the technology are expected to be data processing, risk management, and forecasting. A small majority of SWFs (56%) surveyed think AI has moderate to significant potential to enhance alpha, while 38% think it is too early to tell. This is slightly more optimistic than the central banks included in the survey, of which 41% thought AI had alpha-generating potential.

The report finds that SWFs are strategically investing across the AI technology stack to capitalize on the growth potential of the technology. The report identifies several AI challenges, including lack of expertise, the explainability of models, and data availability.

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}