Risk-Adjusting the Returns to Private Debt Funds

Fisher College of Business Working Paper No. 2024-03-006

Charles A. Dice Center Working Paper No. 2024-06

37 Pages Posted: 26 Mar 2024 Last revised: 6 May 2024

See all articles by Isil Erel

Isil Erel

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Thomas Flanagan

Ohio State University (OSU) - Fisher College of Business

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2024

Abstract

Private debt funds are the fastest growing segment of the private capital market. We evaluate their risk-adjusted returns, applying a cash-flow based method to form a replicating portfolio that mimics their risk profiles. Using both equity and debt benchmarks to measure risk, a typical private debt fund produces an insignificant abnormal return to its investors. However, gross-of-fee abnormal returns are positive, and using only debt benchmarks also leads to positive abnormal returns as funds contain equity risks. The rates at which private debt funds lend appear to be high enough to offset the funds’ fees and risks, but not high enough to exceed both their fees and investors’ risk-adjusted rates of return.

Keywords: Private Credit, Private Capital, Loans, Nonbank, Shadow Bank, Alpha

JEL Classification: G12, G21, G23

Suggested Citation

Erel, Isil and Flanagan, Thomas and Weisbach, Michael S., Risk-Adjusting the Returns to Private Debt Funds (March 25, 2024). Fisher College of Business Working Paper No. 2024-03-006, Charles A. Dice Center Working Paper No. 2024-06, Available at SSRN: https://ssrn.com/abstract=4771873 or http://dx.doi.org/10.2139/ssrn.4771873

Isil Erel

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

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Belgium

Thomas Flanagan (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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