Risk-Adjusting the Returns to Private Debt Funds

Abstract

Private debt funds are the fastest-growing segment of the private capital market. We eval- uate their risk-adjusted returns, applying cash-flow-based methods to form a replicating portfolio that mimics their risk profiles. Accounting for both equity and debt factors, a typical private debt fund produces insignificant abnormal returns 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 high enough to offset funds’ fees and risks but do not exceed both fees and investors’ required rates of return.

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

JEL Classification: G12, G21, G23