Bond “denominator effect” could hinder portfolio switches to private markets

A specialist in illiquid assets anticipates that portfolio allocations to private capital could encounter friction because some investors will be unwilling to sell publicly traded bonds at a loss.

Increased demand for private assets – such as private equity, private debt and infrastructure – is expected to continue, driven by diversification, increased investor access through funds EU Eltif vehicles, and driven by sophisticated investors deepening their ESG commitments.

A recent Schroders study, for example, found that 35% of respondents plan to increase allocations to private assets in the next two years, and some saw this asset class as the best way to engage in the energy transition.

But Howard Sharp (pictured), chairman and co-head of private credit at Alcentra, warned the “denominator effect” could stifle some inflows to private markets.

“People holding bonds have seen values go down as rates go up. This means they’d register a loss if they switched out part of their fixed-income portfolio into alternatives like private debt. This is something that we’re hoping will change in 2024.”

Sharp, who was speaking at a recent private markets roundtable hosted by Funds Europe, nevertheless said that many institutional investors felt themselves to be under-allocated to private markets.

“I think people are generally very interested in the sector, and they want more exposure to the space,” said Sharp.

Representatives from Schroders, Macquarie, and BNP Paribas took part in our discussion, which you can read here.

© 2023 funds europe

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