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The private debt market has evolved from a niche investment into an integral part of institutional portfolios in the decade since the global financial crisis, according to a new study released Thursday by SEI in collaboration with Preqin, an alternatives data provider.

Private debt’s robust position in the private capital ecosystem today has created both opportunities and challenges for investors and managers, SEI said.

According to the study, private debt funds raised some $100 billion in 2015 and again in 2016, and investors increased that amount to almost $120 billion in 2017. Assets under management shot up from $245 billion in 2008 to almost $667 billion a decade later, and are projected to double again by 2023.

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The study found that private debt attracts a wide variety of investors, led by public- and private-sector pension funds and foundations and endowments, which account for 29% and 22% of the investor pool.

These investors have a relatively low allocation to the asset class, in the 3% to 4% range, making them a prime target for fundraising in coming years, according to the study.

At the same time, data surrounding the role of family offices indicate a shift toward the individual investor segment, the study found, with 10% in average allocations and three in five general partners saying that these investors will become an even more important source of capital going forward.

The study was based on a survey conducted last summer among 216 organizations, divided evenly between investors and managers, some of which were selected for in-depth interviews.

According to the study, investors and fund managers view the role of technology differently.

Asked specifically about data analytics, half of all investors surveyed said advancements in analytics would accelerate development of new, customized investment vehicles, and 57% said data analytics would enable more types of investors to participate in the private debt market in the near future. On both points, 43% of managers agreed.

Fund managers, on the other hand, were skeptical on advanced analytics as a driving factor in shaping the industry — even as more firms are expected to rely on technology to help find, vet, negotiate and value opportunities, according to the study.

Challenges Ahead

Although assets under management are projected to double in the next five years to $1.4 trillion, according to Preqin, private debt is not immune to macro changes and evolving market dynamics.

Survey participants expressed differing views on the threat of increased competition from banks as they re-enter the market. Half of investors said this would increase competition, potentially driving down returns, while two-thirds of managers said banks were unlikely to reenter the market at a rapid enough rate to significantly move the needle.

The study said managers’ confidence was understandable, given that an increasing percentage of assets is held by a few mega-lenders, making the current private debt market a stable, orderly, secure corner of the asset management world.

It noted, however, the existence of potentially disruptive technology in the wings. As well, while traditional lenders in the form of banks remain on the side lines, sundry hedge funds are rolling out lending products.

SEI said institutional investors’ attraction to the asset class notwithstanding, private debt is subject to the same market vulnerabilities affecting other investment options and asset classes.

In order for managers to protect themselves from adverse market conditions and a possible slowdown, the study recommended that general partners enhance competitive positioning, focus on expense management, address fee concerns and improve productivity.

“As investor interest in this asset class continues to grow, managers who are able to consistently demonstrate specialist knowledge and expertise, while leveraging new technologies and offering operational excellence, will succeed and thrive in this space,” Jim Cass, senior vice president of SEI’s investment manager services division, said in a statement.

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