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New global research from Aeon Investments, the London-based credit-focused investment company, with pension funds, insurance asset managers, family offices and wealth managers who collectively manage around $545 billion, finds just over a quarter (26%) will dramatically increase allocations to illiquid assets, while 59% of respondents will increase allocations slightly.

However 12% of respondents say they will keep allocations the same and just 3% plan to decrease their level of investment in illiquid investments.

Respondents say the primary motivation for investing in illiquid markets is the need to protect from macro uncertainty. More than half (52%) of investors say this is the primary motivation for choosing private debt investments, which have strategies that offer a floating rate coupon, offering the potential for a natural hedge against inflation.

More than one-quarter (29%) of investors say the most important feature of private debt assets is that they offer diversification benefits. One in ten respondents identified the expanding range of assets offered within private debt strategies as the key motivation for investing. The same number say the increased focus on ESG from the private debt markets is the most important reason behind more professional investors increasing their allocation to private debt.

Within illiquid assets, most investors (80%) favour increasing allocations to residential real estate with 43% expecting to make dramatic increases. Commercial real estate was also seen as a growing area of interest for 81% of respondents, with 28% saying they would increase allocations dramatically.

More than a third (34%) say they will dramatically increase allocations to specialist areas of corporate finance including commercial aviation, shipping and trade receivables. Around two-fifths (41%) of respondents say increases to this sector will be slight.

About half (52%) of investors say they will slightly increase their allocations to consumer credits such as student loans. Eighteen percent will make dramatic increases.

Respondents expect the improvement in customisation and ability to tailor private debt strategies to continue over the next three years. More than half (52%) say this will increase slightly, while just over a quarter (26%) say it will increase dramatically. One-fifth (19%) say customisation will stay the same and only 3% expect it to decrease.

Almost all (96%) investors say it is important that the financial institution offering fixed income and credit funds should co-invest in their investment vehicles with the same underlying risk and fee structure.

Evgeny van der Geest, Head of Capital Markets Strategies said: "The private debt markets continue to innovate and expand offering investors more bespoke solutions that can help them meet their objectives, especially when inflation is high."

"It makes sense that investors want their private debt managers to align their interests by co-investing in the underlying vehicles with the same risks and fee structures. At Aeon it is a priority for us to share the same objectives as our clients."

Aeon Investments is focused on delivering long-term superior risk-adjusted returns, through stand-alone investments that provide its investors' access to key economic sectors. This is achieved by minimising downside risks to ensure capital preservation, and by designing a structure which prioritises alignment of interests.

It employs a research-driven investment approach and uses a combination of qualitative and quantitative techniques. Idea generation and its due diligence process are based on a top-down approach, considering economic, credit and industry cycles, to identify inefficient markets and pricing dislocations.

At the portfolio level, Aeon Investments utilises a bottom-up approach, employing a rigorous due diligence process to assess the intrinsic value of the underlying collateral or credit, manage risk, and ultimately maximise return potential for investors.

This structural, statistical, and fundamental approach gives us a deep understanding of risk, which allows Aeon Investments to mitigate and structure for idiosyncratic and systemic risk during portfolio construction, and for the duration of the investment.