Many credit markets have historically been dominated by banks and largely inaccessible to institutional investors, particularly in Europe. Instead, investors have looked to private equity, real estate, infrastructure and hedge funds to access alternative risk premia, including the illiquidity risk premium, to help diversify the sources of return. The available opportunity set is changing rapidly as strict regulation of the financial sector has led to a loss of bank lending capacity, and as such created an opportunity for institutional investors to step in and provide capital in illiquid credit.

Institutional investor appetite for illiquid credit has grown since the global financial crisis, attracted by the higher return potential versus traditional credit and the opportunity created by reduced bank lending capacity. However, in the context of the size of illiquid credit markets (for example, approximately 70% of corporate lending in Europe is done by banks) and the capital vacuum being created by the retrenchment of banks, take-up remains relatively muted. We believe there is significantly greater scope for investors to consider illiquid credit as a meaningful part of both low-risk and return-seeking portfolios, indeed we view this as an excellent opportunity for clients with a tolerance for illiquidity and a desire to improve overall portfolio efficiency.