The Components of Private Debt Performance

26 Pages Posted: 6 May 2017 Last revised: 6 Sep 2017

See all articles by Margherita Giuzio

Margherita Giuzio

EBS Universität für Wirtschaft und Recht; European Central Bank (ECB)

Andreas Gintschel

Prime Capital AG

Sandra Paterlini

University of Trento - Department of Economics and Management

Date Written: May 22, 2017

Abstract

In an environment of near-zero yields for traditional asset classes and tightening bank regulation, debt in privately arranged loans has become an interesting alternative to publicly distributed bonds for borrowers and professional investors. Key questions for potential investors concern the expected return and risk inherent to such investments, and the diversification benefits they offer for strategic asset allocation. Due to the private nature of these markets, however, historical data are not available at a micro level. For most segments of the market, representative current yield figures for Europe can be only inferred from anecdotal evidence around current transactions or derived from central banks’ aggregate series. In this paper, we analyse private debt interest rates and their features relevant for asset allocation decisions using a mix of non-public data, snap-shot data, and publicly available, highly aggregated historical data on bank loans. By means of regression analysis, we can disentangle the main components of private debt rates over time, and assess the existence of a premium related to the illiquidity and complexity of private debt markets. We build an investable proxy for private debt returns and we look for possible diversification opportunities in asset allocation. We find that efficient portfolios obtained by investing in private debt are more diversified and achieve higher expected returns for any given level of expected risk than portfolios that do not invest in this asset class.

Keywords: Private Debt, Liquidity Premium, Diversification, Portfolio Selection

JEL Classification: G1, G11, C58

Suggested Citation

Giuzio, Margherita and Gintschel, Andreas and Paterlini, Sandra, The Components of Private Debt Performance (May 22, 2017). Available at SSRN: https://ssrn.com/abstract=2963713 or http://dx.doi.org/10.2139/ssrn.2963713

Margherita Giuzio (Contact Author)

EBS Universität für Wirtschaft und Recht ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

HOME PAGE: http://www.ebs.edu/13108.html?&L=1

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andreas Gintschel

Prime Capital AG ( email )

Frankfurt
Germany

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

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