Study reveals UK institutional investors/pension funds are increasing their focus on structured credit

This is because they offer attractive yields when compared to other asset classes, and because they are also secured against collateral and subject to structural protections such as debt covenants and credit enhancement.

When asked to identify key reasons behind this growth in demand for structured credit, the top reason given by institutional investors in the UK was the desire to seize new investment opportunities. The next most important feature was the need to protect against macro uncertainty, followed by an increased drive for greater diversification and then the ability to gain access to ESG benefits that can exist in sub-asset classes with structured credit.

When asked for their reasons as to why institutional investors are increasing their allocation to structured credit now, the top reason given by 55% of UK institutional investors was that there is greater innovation in the structured credit investment market, followed by 30% who said it was due to an improving regulatory environment. 20% of UK professional investors attributed it to greater transparency in the sector.

Another growing attraction of structured credit is that it can increasingly be customised to investor needs. This can lead to more bespoke maturity and return profiles that can be appealing to investors. Some 70% of pension funds and other institutional investors in the UK interviewed by Aeon Investments expect the level of customisation in the structured credit market to increase between now and 2025.

Which structured credit sectors will see the biggest increase in asset allocation from investors?

In terms of which areas of the structured credit market is likely to see the biggest inflows from investors over the next 18 months, 65% of UK institutional investors surveyed anticipate allocations to products focusing on residential real estate will see an increase, and 60% also expect an increase in allocations to commercial real estate. Some 50% of respondents expect an increase in investment inflows into structured credit vehicles focusing on consumer credit such as student loans and auto credit/leases.

Evgeny van der Geest, Managing Director, Aeon Investments said: “Our research shows that institutional investors in the UK are increasing their focus on structured credit. Not only do they offer attractive yields, but this growth is being driven by a desire to seize new investment opportunities. The structured credit market has seen huge developments in recent years, in terms of maturity and transparency, as well as the ability for it to be increasingly customised to investor needs – all of which are driving demand.”