Appendix - SWF Investment Focus Inclusive Of Private Debt - 10 JULY 2017

Against the backdrop of the world's sovereign wealth funds (SWFs) diversifying their investment approach away from luxury brands and pure energy plays and towards assets from a range of industries that offer more reliable long-term investment returns ( see 'SWFs Adapting To Survive', April 5 2017), we note that these state-backed investment vehicles are increasingly investing in private debt. The appeal of the asset class is simple: private debt investments offer investors strong risk-adjusted returns and low correlation to other asset classes, making them more reliable during periods of volatility, like those we have seen in the global economy and markets over the past couple of years. As of the end of H117, around 40% of all active SWFs active globally invest in the asset class, which is up by around 5 percentage points from the same time 12 months ago. According to research from Preqin, the lion's share (56%) of SWFs with assets totalling USD10bn or more now allocate funds to private debt, while around two thirds (67%) of those managing USD250bn or more do the same and all funds (100%) managing anything in the region of USD100bn to USD249bn have committed investment to the asset class. We note that these SWF private debt investments typically focus on three areas: direct lending, mezzanine debt and distressed debt. In the case of mezzanine debt, 70% of funds investing in debt target this strategy, making it the strategy of choice. In the case of the distressed debt, 63% of SWFs with a focus on private debt have targeted distressed debt opportunities. Following these, direct lending has also proven to be popular, with 53% of funds seeking an investment there, as Preqin data show.

The Bigger Funds Are Getting Involved
Global - SWF % Invested Into Private Debt By Total AuM, USDbn
Source: Preqin, BMI

Fundraising Focusing On Direct Lending

The amount of capital raised by SWFs for private debt funds across the 2016 full-year period totalled USD94bn. Illustrating just how much SWF interest has grown in the private debt space, Preqin data show that fundraising has increased by nearly four-fold from the USD25bn level it stood at as recently as in the 2009 full-year period. Looking ahead, we believe it is likely that we will see an increase in allocations and fundraising in the space over the coming years, even if activity levels for securing fresh commitments have been low in the y-t-d period, with just USD23bn secured in the first quarter and USD9bn in Q217. Within this we note that direct lending, which is often used to support private equity buyouts ( see 'PE Buyouts Struggling To Compete With Strategic Acquirers', May 10 2017) has been the most popular strategy thus far this year, with USD16.2bn committed to it globally, ahead of distressed debt (USD8.2bn) and mezzanine debt (USD4.4bn).

Portfolio Diversification Across The Globe

The growing interest for private debt in the SWF industry is a global story. In terms of fundraising, the North American funds have been the most proactive at securing capital; however, it is Europe that has become the region of focus for the deployment of that fresh capital.

In terms of fundraising, 23 North American-focused funds have closed on USD20.8bn in fresh funds since the turn of the year, which is more than double the haul raised in any other region. Some way back in second spot is Europe, where 12 closes have seen funds close on USD10.3bn. The one region that investors appear to be largely shunning so far in 2017 is Asia, which is by far the global laggard with just three closes securing a paltry USD0.4bn to be put into private debt.

When it comes to the focus of deploying that capital, however, the hierarchy of regional focus is changed, with Europe serving as the region of choice for SWFs looking for further private debt exposure. Indeed, as of the end of H117, more than half (60%) of funds active in the asset class have a focus on Europe, ahead of 53% funds that also have a North American interest. As was the case with the y-t-d league table of funds raised, Asia, together with the Middle East and North Africa (MENA) region, remain at the bottom of the pile in terms of the deployment of capital. That said, we highlight that they have been able to gain some traction over recent quarters. As Preqin data show, of the global SWFs investing in the private debt asset class, 37% continue to have a preference for Asia, while 33% continue to target the MENA region. In total, 43% of all active SWFs investing in private debt have an emerging markets (EM) focus in their portfolios. Given this, it appears that SWFs, armed by fresh capital closes, are very much in search of the best returns on offer and are willing to diversify their investment strategies across the globe to this end. Among this, however, the preference for North American and European markets suggest that funds continue to be drawn to a more steady and reliable framework for investing.