Debt investments, in fact alternative asset classes – any investment outside of cash, bonds and stocks – are moving into the mainstream. And the market is showing little sign of abating.
The rise of debt investment
Before delving straight into our findings, it is helpful to take a look at the origins of the debt investment movement.
We can track the rise of debt investment back to the 2008 global financial crisis, which provided the right conditions for alternative investment classes like this to flourish. After the crash, more and more traditional lenders scaled back their lending and embraced more stringent borrowing criteria, creating a vacuum to fill. Individuals and businesses needed somewhere to turn for capital, while investors were seeking options for improved returns for their finances.
A wealth of different private debt strategies arose, each with varying risk and return profiles, to meet investors’ changing needs. One of the most popular forms of debt investment that emerged came in the form of real estate funds – here, a private investor provides the funding required to develop or renovate a property (or properties). This sector is growing every year, and not just in the UK; in 2018, real estate debt funds raised $28.6 bn globally, up from $23.6 bn in 2016.
This alternative class is slowly entering the portfolios of many new and seasoned investors; 9% of investors surveyed said they currently already hold some form of debt investment, with a fifth considering this investment type within the 2019/20 financial year. At 34%, this figure is even higher amongst investors aged under 35.
Having established the rise of debt investment over the past decade, we can now turn our attention to the reasons behind this soaring popularity.
The attraction of debt investment
For investors, one of the main attractions of the private debt market is the ability to achieve regular, fixed returns; 30% of UK investors are attracted to debt investment due to the asset class’ ability to deliver regular returns.
This is particularly important today given the UK’s ongoing climate of uncertainty in the wake of Brexit. Current market conditions have driven investors to look outside the remit of traditional investment vehicles in search of better returns than those on offer through savings accounts and government bonds. Indeed, interest rates have remained at below 1% for a decade now, with little indication of when this will be revised upwards.
36% of investors are attracted to debt investment precisely because interest rates are so low. At the end of the day, investors are on the lookout for opportunities that will not only offer reliable returns but can also make their money work harder without forcing them to commit to long-term investments.
Clarity and ease are also a major pull factors. While debt investments and equity investments both carry risk, the former offers one important additional advantage – investors have more control over the risk profile and the length of the loan and are able to determine these parameters ahead of time. Put simply, there is no need to consider when and how to best liquidate your position. Instead, the principal is simply paid back, with interest, over the debt’s lifetime.
For retail investors who generally prefer less demanding financial instruments, the clarity this asset class provides makes it particularly attractive. In fact 35% of investors think one of the strengths of debt investment over other asset classes is that the exit strategy is unambiguous. Ultimately, this means they won’t find themselves locked into an unsuitable investment for longer than they’re comfortable with.
Shadrach is a Trending Journalist. His first job was as a newsreader and journalist at an award winning magazine. He spends most of his time scouring the internet for the hottest topics to share with his readers.