Risk and return in the Private Debt sector: An in-depth exploration

Risks in the Private Debt Sector.

1. Credit Risk

Private debt investors face the risk of borrower default. Thorough expert credit research is crucial to mitigate this risk.

2. Liquidity risk

Compared to public markets, private debt investments can be more difficult to liquidate, potentially trapping investors in unexpected capital needs.

3. Market risk

The value of private debt investments can be affected by market fluctuations, economic conditions and interest rate fluctuations.

4. Operational risk

Operational problems at both the investor and borrower, such as poor management or legal issues, can adversely affect returns.

Returns in the Private Debt sector

1. Rate of interest

One of the main sources of return in private debt is the monthly interest received on the loans made, on average net 3.5% higher than traditional bonds. (Source: Institutional Limited Partners Association (ILPA))

2. Diversification benefit

Adding private debt to a portfolio allows investors to diversify their risk, potentially achieving better return-to-risk ratios. On average, this yields 2% more than a comparable traditional fixed income portfolio.

3. Liquidity and complexity premium

Capitalizing on this premium requires a long-term buy-and-hold strategy with associated financial and legal expertise of the market, companies and

Conclusion

It is critical for investors to work with dedicated expert managers who ensure that the loans also consist of well-structured collateral. The combination of an attractive interest rate and a strong focus on capital preservation is very attractive to investors.

At WDL, we approach a case from the investor’s perspective and thus will always look at the underlying security (LTV) in conjunction with the yield. We also do this within the 1st mortgage fund, which generates an attractive return (6.25% net monthly) and has an excellent diversification (50 to 80 financings), with a term of 1.5 to 6.5 years, with intermediate repayments (after 1.5 years).