According to Invesco’s Global Government Asset Management Survey 2024sovereign wealth funds (SWFs) are increasingly paying attention to the new lending environment in which banks are ceding territory, opening a gap in the market for alternative lenders.

The report, which gathered insights from 140 senior investment professionals representing 83 sovereign wealth funds, pointed to a “significant shift” in the lending landscape driven by increased capital requirements and tighter regulations for banks since the GFC.

With the advent of this new opportunity, over half (56 percent) of DIFs are seeking exposure to private credit through funds, and around 30 percent are engaging directly or through co-investments.

"As traditional lending channels remain constrained, the role of private credit in SWF investment strategies looks set to grow, with two-thirds of SWFs planning to increase their allocation to private credit in the coming year," the report said.

Diverse sources of these additional allocations are noted, with DIFs primarily reallocating capital from fixed income (34 percent), public equities (26 percent), and private equity (24 percent).

Geographically, much of the focus remains on opportunities in the US and Europe, although the survey highlights the growing recognition of other markets such as India.

Among the sectors with the greatest focus within private credit were infrastructure debt (51 percent), real estate debt (50 percent) and direct corporate lending (29 percent).

The attractiveness of these sectors, according to the study, "reflects their potential for stable, long-term cash flows and the opportunity to capitalize on growing demand for infrastructure and real estate financing globally."

Revealing the attractiveness of private credit, DIFs note its potential for diversification (63 percent) along with the relative value of private credit compared to conventional debt (53 percent). Other "significant draw cards" were high-income components (49 percent) and the ability to influence deal structures and protections (37 percent).

"The strong performance of private credit investments is further fueling interest in the asset class," the survey explains, adding that over a third of DIFs with private credit investments report that returns have "exceeded their expectations."

Only 5 percent described returns as worse than expected.

Internal versus external managers

Looking at the competitive alternative lending landscape, SWFs also noted a number of challenges. Among their top concerns are finding high-quality opportunities (78 percent), aligning interests with partners (47 percent), and evaluating and pricing (44 percent).

In response, the study notes that many SWFs are building in-house private credit teams with specialist capabilities and expertise.

"They also focus on identifying the best performing funds and strategically position themselves to access attractive co-investment opportunities," it said.

“SFIs are also leveraging their unique strengths to gain a competitive advantage in the private credit market. For example, their long-term investment horizons allow them to be patient and selective in finding deals, focusing on opportunities that align with their strategic objectives and risk tolerance.

"Furthermore, many SWFs form strategic partnerships with leading private credit managers, using their scale and influence to secure favorable terms and access to exclusive deal flow."

Larger funds with more than $100 billion in assets under management will likely rely on a combination of internal and external resources.

In particular, the decision to use external managers or build in-house teams involves a number of factors, including cost, control and access to expertise.

While external managers can provide a wide network of industry contacts, exposure to high-quality deals and help mitigate some of the risks associated with direct investing, they can also have higher fees and can mean a potential loss of control on SWF investment decisions.

"As SWFs become more experienced and sophisticated in their approach to private credit, many are looking to build their own in-house teams to gain more direct control over their private credit investments and reduce costs," it said in the survey.