Wealth managers are increasingly investing in private debt as an alternative investment option 1 . Private debt provides financing to private companies that are unable to secure traditional bank funding, and it can offer investors access to alternative sources of higher yield and flexibility to invest in the global real economy 2 . Private debt investments can also be an effective way of diversifying away from listed bonds and growth assets 2 .
Private debt is a broad and versatile asset class, offering a variety of approaches, so it’s important to choose a private debt strategy that aligns with your investment objectives and existing holdings 2 . Private debt funds of funds invest in a variety of third-party debt funds depending on the fund strategy, providing greater portfolio diversification 3 .
According to Preqin, 36% of investors are attracted to private debt because it provides them with a reliable income stream, while 37% cited the asset class’ high returns 4 . In 2021, an innovative approach to offer private debt to DC scheme members, smaller DB funds, and wealth management clients was launched, democratizing private debt investing 5 .
Investors should be aware that private credit isn’t a monolithic asset class, and it includes subcategories as diverse as investment-grade private placements, real estate debt, and venture capital loans 6 . Loans mainly fall into two categories: corporate loans (financing companies) and real asset loans (financing things) 6 . Two of the more significant opportunity sets for investors in corporate loans include senior credit and junior credit, which invest in loans made to midsize, well-established businesses 6 . Meanwhile, distressed debt, opportunistic credit, and special situation strategies involving private credit can offer investors higher returns but also higher risk 6 .