A majority of global limited partners (LPs) expect to integrate public and private credit allocations over the next five years, according to research from alternative credit manager Benefit Street Partners (BSP).
59% of LPs anticipate taking a more integrated approach to public and private credit within five years, up from 35% today. The findings are based on a survey of 135 senior investment professionals across North America, Europe, Asia-Pacific and the Middle East.
Overlap between public and private markets — including shared borrowers, comparable risk profiles and co-investment opportunities — is driving investors towards a more holistic view of credit, the researchers shared.
Currently, 5% of LPs are reporting fully unified credit portfolios, but this is expected to rise to 19% within five years. 40% of respondents said they expect to be in the process of integrating public and private credit allocations over the same period, up from 30% currently.
The perceived mismatch in liquidity between public and private credit markets was cited as the primary barrier by 65% of respondents. Differences in transparency, particularly around underlying assets and pricing, were also highlighted by 52% of LPs.
19% of respondents pointed to reluctance among internal teams to merge public and private credit functions, while 17% cited a lack of appropriate governance structures and processes.
As one US insurance chief investment officer put it, separating public and private credit “doesn’t really make sense” from a risk management perspective, reflecting a wider industry view that integration will pick up as practical challenges are ironed out.
Fund selectors: Private credit “complement, not replacement”
Allison Davi, co-COO at Benefit Street Partners, said: “As institutional investor adoption of private credit strategies grows and diversifies, closer integration with their public credit allocations is under the spotlight. Our research shows LPs have the appetite for closer alignment, but there are a few barriers to further integration that need time to work through.
“One of those is separation of responsibilities within a team, with varying levels of experience – particularly in different geographies – around how the two asset classes function. They have distinct liquidity characteristics that are fundamental to their risk-adjusted return profiles.
“Another is the immediacy of information. The requisite transparency is already available from most managers, with lots of underwriting data published quarterly. That asymmetry with public loans, which are traded daily, works in most market conditions, but a disconnect can occur in times of serious volatility. Innovation and time should reduce that disconnect, which is important as LPs seek fewer but deeper manager relationships.
“Ultimately, convergence of public and private debt is the direction of travel. This will give LPs even more comfort as they increasingly access a broader opportunity set in private credit but still want portfolio flexibility and lower volatility.”
