As institutional investors consider adding private debt to their portfolios, Callan’s Jay Kloepfer, executive vice president and the director of Capital Markets Research, prepared answers to some high-level questions about the characteristics and implementation considerations for private debt investing.
In the paper he wrote, “The Private Debt Pie: Do You Want a Slice? Do You Need One?” they noted that Callan characterizes the objective of investing in private debt as obtaining a stable, income-oriented return from an unlisted debt or debt-like instrument.
Callan’s coverage of the private debt universe primarily focuses on real estate, corporate credit, and infrastructure issuers, assets, and projects; however, we also consider a variety of other strategies as well. Callan’s coverage of private debt is not organized by loan or security type, and our focus is to capture the true risk-adjusted and loss-adjusted characteristics of investment strategies we review.
Callan believes that over a long investment horizon across market cycles, based on historical return patterns, private debt investing can offer compelling performance. This result can be achieved with a combination of thoughtful portfolio construction and pacing, a careful approach to strategy selection and the credit profile of targeted investments, rigorous manager screening, comprehensive due diligence, and thorough portfolio monitoring.
With this approach, private debt can produce strong income-oriented returns while also offering potential capital preservation relative to equity investments in equivalent market segments.
Of the risks involved with private debt, Callan believes credit risk should receive more attention. For private corporate credit strategies, issuers are typically smaller, may have more concentrated customer and vendor bases, or may face other operational risks that make it harder to weather an extraordinary corporate event or an adverse market climate. We also believe that income returns are not created equal and it is important to understand the nature, source, and stability of the income return, as well as any conditions that may threaten income generation and a full recovery on the debt investment.
For more of their answers to private debt issues, read their full paper here.
