The majority of limited partners (LPs) expect to take a more integrated approach to public and private credit within five years, according to a survey by Benefit Street Partners (BSP).
Alternative credit manager BSP, a Franklin Templeton company, found that the growth of private credit has led to significant overlap with public markets due to shared borrowers, risk profiles and co-investments.
This has prompted more LPs to think about their private credit allocations more holistically, with 59 per cent saying they will take an integrated approach within the next five years, up from 35 per cent today.
Over the next five years, a fifth of LPs expect to have achieved full public-private credit integration in their portfolios, up from just five per cent today, the survey found.
Read more: Benefit Street inks $1.1bn CRE CLO
Over the same period, 40 per cent expect to be in the process of taking a more integrated approach, up from 30 per cent, the survey found.
The research surveyed 135 senior investment professionals at asset owners across North America, Europe, Asia-Pacific and the Middle East, with combined assets under management of $8tn (£6tn).
“As institutional investor adoption of private credit strategies grows and diversifies, closer integration with their public credit allocations is under the spotlight,” said Allison Davi, co-chief operating officer at BSP. “Our research shows LPs have the appetite for closer alignment, but there are a few barriers to further integration that need time to work though.”
Read more: Benefit Street Partners and Alcentra align under BSP brand
When asked about the key barriers to unifying management of public and private credit portfolios, 65 per cent cited the liquidity mismatch and 52 per cent highlighted challenges related to transparency in underlying assets and pricing.
Other concerns highlighted in the survey included the reluctance of internal teams to merge, as well as the lack of appropriate governance structures.
“Ultimately, convergence of public and private debt is the direction of travel,” said Davi. “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.”
Read more: Benefit Street closes largest RE debt fund to date at $10bn
