Wealth managers consider several risks when evaluating private debt investment teams. Here are some of the key risks:
- Credit risk: The main risk associated with private debt investments is credit risk, which is the risk that a borrower will not repay the loan or pay the interest at the time defined in the credit agreement. This risk can be managed and mitigated using a number of techniques, including the use of collateral and/or guarantees 1 .
- Market risk: Private debt investments can be exposed to market risk, which arises when the credit is secured by a real asset whose market value may vary, or when the credit is sold on the secondary market 1 .
- Liquidity risk: Private debt investments can be exposed to liquidity risk, which is the risk that the investment cannot be sold quickly enough to meet cash flow needs 2 .
- Manager risk: Private debt investments can be exposed to manager risk, which arises when the investment team is not experienced or skilled enough to manage the investment effectively 2 .
- Regulatory risk: Private debt investments can be exposed to regulatory risk, which arises when changes in regulations or laws affect the investment 3 .
- Interest rate risk: Private debt investments can be exposed to interest rate risk, which arises when changes in interest rates affect the value of the investment 3 .
- Operational risk: Private debt investments can be exposed to operational risk, which arises from the potential for errors or failures in the investment process 4 .
Overall, wealth managers consider credit risk, market risk, liquidity risk, manager risk, regulatory risk, interest rate risk, and operational risk when evaluating private debt investment teams. By evaluating these risks, wealth managers can make informed decisions about private debt investments that align with their investment objectives and risk tolerance.