The growth in illiquid credit far outpaced growth in all other alternative investment asset classes (such as real estate and hedge funds). Overall, the 100 largest managers of alternative assets saw assets under management increase by just 10% in 2016. Direct hedge funds even saw net outflows, as assets under management fell from $755bn to $675bn, with investors put off by poor performance, a lack of transparency and persistently high fees.
Illiquid credit is relatively popular in Europe compared to the rest of the world, as the hunt for yield has intensified amid record-low interest rates. Some 37% of illiquid credit assets are invested in Europe, compared to 44% in the US. In reality, this percentage may well be even higher since more than two thirds of the world’s largest alternative asset managers are based in the United States.
Pension funds and insurance companies continue to dominate the illiquid credit space, as they are less hindered by liquidity requirements. But private banks and wealth managers are also making inroads.
Direct loans are especially popular, as they offer floating rate yields, protecting investors against rising rates. However, the unprecedented rise in inflows to such strategies should make some alarm bells ring, believes Luba Nikulina, global head of manager research at Willis Towers Watson.
“As capital supply and competition have increased in some segments of the illiquid credit universe, such as direct lending for example, yields are not always offering sufficient compensation for illiquidity and risk,” she said.
"As capital supply and competition have increased, yields are not always offering sufficient compensation for illiquidity and risk" - Luba Nikulina