Opportunities in private debt 

We see three key steps to implementing private debt manager selection and due diligence.

Today’s private debt market is growing and changing fast. A surge of new entrants and increasing dispersion in manager performance has made sourcing and accessing the most attractive private debt opportunities that much harder. 

Determining your objectives and how private debt can work hard for your portfolio is the first step towards building a well-diversified allocation. Putting the building blocks together by identifying and accessing highly rated managers comes next. 

Ensuring thoughtful diversification across the private debt spectrum, from direct lending, structured credit and speciality finance to credit opportunities, is the final key piece for building a private debt portfolio. 

This asset class can make a significant contribution to portfolio resilience. It can provide protection. These loans are typically floating rate, providing investors with inflation protection. In a disinflationary, falling interest rate environment, rate floors in private debt deals can help soften the impact of rate declines. 

Private debt delivers diversification through access to alternative sources of higher yield, the flexibility to invest in companies across the real economy and the opportunity to move away from listed bonds and growth assets.

While the growth of the private debt market has expanded the opportunity set, it’s also driven competition and complexity. 

The rising number of strategies has made it harder to discern the best managers, while increased investor demand has made reaching the opportunities that count incredibly competitive.

A portfolio mainstay

There are a number of reasons lenders find private debt attractive, from potential double-digit yields and increased structural protections, to lower leverage. We believe that private debt can add robustness to portfolios for investors seeking downside protection and durable returns.

Where to focus within private debt?

Within private debt, two areas really stand out for us at the moment.

The first is senior private debt, which looks strong from a relative value perspective. All-in yields are historically high, and an array of favourable terms are on offer for lenders, from stronger covenants to lower loan-to-values.

The second is opportunistic credit, which includes areas like distressed debt, special situations and capital solutions. Capital solutions is the standout of the three. It helps companies navigate transitions or complex capital structure issues, and as a result is particularly strong in the current market environment, often offering mid to high-teen potential returns for lenders.

Implementing private debt manager selection and due diligence

We see three key steps to getting it right. First, determine your investment objectives and how private debt fits into the overall portfolio picture. Next, seek to identify the best managers to deliver against those objectives – and a route to accessing them. Finally, diversify thoughtfully across the entire private debt spectrum, taking in the wide range of assets on offer.
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