The differences within the asset class Private Debt

So we see different forms and with that I give an important tip in advance: know what the actual risks are. In this blog, a discovery about the dynamics of Private Debt and a relevant consideration for you as a wealth advisor.

1. Types of Private Debt

Private Debt covers a wide range of investment vehicles, including direct loans (1-to-1 or peer-to-peer), mezzanine loans and distressed debt. It is important for wealth advisors to have a thorough understanding of these different categories in order to properly assess risk-return profiles.

2. Risk and return differences.

The diversity of the different categories brings considerable variation in risks and returns. It is crucial for wealth advisors to understand the specifics of each category and match them with your clients’ investment objectives.

3. Liquidity considerations

Compared to the exchange tradable bond, Private Debt is often less liquid. As wealth advisors, you should consider this when preparing a good cash flow calculation, which takes into account the client’s liquidity needs.

4. Collateral

To properly understand risk, you need the knowledge of what the collateral provides in terms of security in a negative scenario. For example: What is the difference in security between a hospitality property with key rights or a property that houses a number of healthcare providers? And what about cash flow?

5. Where does the cash come from

Collateral on a financing is important, but where the cash comes from and how it is generated to pay the interest and principal is even more important. After all, if the interest and repayment can simply be met, the collateral is never needed to return your equity including interest! Again, it is important to make a good estimate based on the figures for recent years.

6. Market influences

Finally, of course, there are always possible market influences, such as economic cycles and interest rate fluctuations. These have different effects on the forms of Private Debt. Understanding these influences and managing and anticipating them appropriately is critical to securing the risk-return ratio for the term agreed upon.

Conclusion

Understanding and being able to fathom the distinctions within the asset class of Private Debt is critical for an asset advisor to effectively advise your clients. By taking into account the dynamics, risks and returns, you as an asset advisor can better meet the unique needs and objectives of your clients in an ever-changing investment landscape. Of course, we are happy to help with this exploration. Because we have this experience and look at everything from the sober side. We do this by being transparent and presenting the cases through our opinion to you as an advisor and to the investor. If you would like to see examples of this you can contact me.