Wealth managers consider several factors when evaluating private debt investments. Here are some of the key factors:
- Investment strategy: Wealth managers evaluate the private debt strategy to ensure it aligns with their investment objectives and existing holdings. 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.
- Risk management: Wealth managers evaluate the risk associated with private debt investments. Private debt includes subcategories as diverse as investment-grade private placements, real estate debt, and venture capital loans 1 . Wealth managers should choose a private debt strategy that aligns with their risk tolerance.
- Diversification: Wealth managers evaluate the diversification of private debt investments to minimize risk. Private debt funds of funds invest in a variety of third-party debt funds depending on the fund strategy, providing greater portfolio diversification 2 .
- Yield and returns: Wealth managers evaluate the yield and returns of private debt investments. 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 attractive yields and returns. 3 . Wealth managers should choose private debt investments that offer
- Manager selection: Wealth managers evaluate the manager’s track record of success in managing private debt investments. A competent manager becomes critical once a decision is reached to employ alternative credit strategies 2 .
- Complexity: Wealth managers evaluate the complexity of private debt investments. Some private debt strategies focus on assets or structures too complex for typical traditional lenders to underwrite, relying on complex approaches to properly evaluate and manage risks that they can understand and evaluate properly. 1 . Wealth managers should choose private debt investments
- Valuation: Wealth managers evaluate the valuation of private debt investments. Debt valuations can be impacted by a multitude of factors, including market rates, company performance, asset coverage, observed 4 .
Overall, wealth managers evaluate private debt investments based on investment strategy, risk management, diversification, yield and returns, manager selection, complexity, and valuation. By evaluating these factors, wealth managers can make informed decisions about private debt investments that align with their investment objectives and risk tolerance.