The Secrets to Evaluating Private Debt

Private debt offers an attractive opportunity for some institutional investors in this challenging financial environment, as they confront low yields today yet need to bolster their portfolios against the impact of rising rates.

(Estimated reading time: 1 min 19 sec).

At Callan's 2017 National Conference, Kristin Bradbury of our Independent Adviser Group, Alex Browning of our Fund Sponsor Consulting team, and Jay Nayak of our Private Equity Research group discussed the risks and rewards of two parts of this asset class in their presentation, “It's Private: Real Estate Debt and Middle Market Direct Lending.”

Callan believes that the portfolios of some institutional investors may benefit from an allocation to private debt, either through commercial real estate debt, lending to middle market companies (those with under $100 million in annual earnings), or originating/acquiring debt in other market segments such as infrastructure.

Its private image

The three speakers strongly emphasized that for private debt, the devil is in the details. These investment segments are not as transparent as traditional equities or fixed income instruments that are the staple of many large asset pools, and they exhibit idiosyncratic credit risks.

But in a low-return environment where many expect higher interest rates, thoughtful investment in private debt may offer an attractive risk-reward profile to some investors.

They also emphasized that private debt requires an intense commitment from an administrative and operational standpoint. Depth of resources and expertise is required to carefully evaluate and screen the broad manager universe and market landscape, identify compelling private debt opportunities, perform thorough up-front due diligence, and actively monitor investment exposures after initial commitments are made.

Read a summary of their full presentation here.