(Bloomberg) -- Almost half of private markets investors plan to increase their target allocations to the $1.6 trillion private credit market, according to a survey from alternative asset manager Coller Capital.

The London-based firm’s Global Private Equity Barometer found that 44% of investors planned to boost their stakes in private credit, comfortably surpassing the percentage intending to ratchet up their involvement in other asset classes, such as infrastructure, real estate and private equity.

Investors have flocked to the private credit market this year, with a host of banks and asset managers pouring capital and resources into the fast-growing industry. That’s thanks to its relatively senior position in borrowers’ capital structures when compared with equity. Higher interest rates have also boosted the yields on its floating rate products, leading to a stronger fundraising environment than for private equity.

Private credit’s lower risk profile is likely to prove attractive to investors, even if potential returns are a few percentage points lower than those offered by private equity, according to Ed Goldstein, partner and CIO of Coller Credit Secondaries. 

“On a relative value basis, you’re going to think really hard about how much do I want to allocate to private equity versus private credit,” he said.

The trend toward private credit is particularly strong in the APAC region, where 72% of investors plan to increase their allocations. Goldstein put the interest from Asian investors partly down to slow deployment last year, driven by portfolio reorganizations, regulation and capital controls.

Traditionally, Asian investors would commit less capital from the region into global funds compared with the amount of capital they would source from North America and Europe. This year has seen a notable drop off in the amount of capital raised, dropping to $1.5 billion in the first half of 2023, versus $13.7 billion in 2022, according to PitchBook.

Read more: How Private Credit Gives Banks a Run for Their Money: QuickTake

Favorable Environment

The survey also found that 45% of investors felt the current interest rate environment is favorable for private credit performance, while 36% said the effects of higher interest rates on their private credit portfolios are yet to materialize. “That double impact you may have had 12-18 months ago of higher rates and higher spreads because the market was a bit wobbly and worried about a recession coming is not there anymore,” Goldstein said. 

“You’re probably out at the top tick of the market in terms of the yields you can achieve today versus a year ago I think, for private credit,” he said. More new entrants and a slowdown in M&A have led to margin compression this year, he added.

Coller Capital’s Global Private Equity Barometer surveyed 110 private markets investors, with a combined $2.2 trillion in assets under management. 

Here are some other interesting data points from the survey:

  • 76% of respondents said that private credit managers would increase lending to the private equity industry faster than banks over the next 1-2 years
  • 88% surveyed said that using debt to fund new commitments is not a viable approach over the next 1-2 years
  • 58% of LPs anticipate further consolidation of private market fund managers in the next 3–5 years
  • Half of LPs expect to see more co-investment opportunities in the next 12 months across all regions, while a fifth of LPs reported greater appetite for these investments

(Updates headline and adds APAC data in seventh paragraph)

©2023 Bloomberg L.P.