Private Debt: Volatility, Credit Risk, and Returns

Abstract

We examine the performance of investments made by private credit fund managers into over 440 private companies in 13 Asian countries from 2001 to 2015. We show that the returns to private debt investments are relatively uniform across size, country and industry despite diversity in legal and economic system, size and age of credit markets. We compare the returns to two investments strategies commonly adopted by credit fund managers – buy-and-hold and secondary trading strategies. We find that strategies which involve buying/selling private debt on the secondary market deliver higher returns than a strategy of buying-and-holding a primary issuance. Finally, we conduct time series analysis of the variation in the performance of private debt investments. We build a private credit return index from the underlying loan data and calculate excess returns to private debt investments. Excess returns are positive and stationary over time. Excess returns are positively related to volatility (as measured by ΔVIX) and to credit risk (ΔTED spread) but are not influenced by market liquidity.

Keywords: Private debt, performance, trading strategies, excess returns, credit risk, liquidity, volatility

JEL Classification: C53, D82, G23, G24