Private debt is simply a debt instrument that’s negotiated directly between the borrower and the lender, and it’s generally used in cases where traditional financing is not available, such as bank loans or bond issuance either due to the type of debt being sought or because the borrower themselves are too small.
Investors access the private debt market generally through an investment fund structure because there is no secondary market for true private debt. So investors will buy units in a private fund and then the investment manager will be the one who will extend the loans to the borrowers directly. The fees in these types of funds are generally quite high. An annual fee of 2% and 20% of the yield performance is not uncommon in this market.
Well, one of the rewards with private debt is a higher yield, which of course is attractive in today’s environment. Also the debt is often secured, which gives investors some comfort. But there are a number of risks associated with private debt. One being you’re reliant on the investment manager to really have very solid credit skills, the ability to assess the downside of the loans and to structure them to protect the investors. They’re illiquid because there’s not a big market. They’re not marked to market, and so they’re kept at book value and so everything’s great until it’s not.
