What do you consider to be the most im- portant aspect of constructing private debt portfolios?

Private debt offers an attractive risk/return profile, particularly in the current high-base-rate environment, with senior direct lending offering an unlevered net IRR of 10-11%1). Its tighter documentation and stewardship by GPs with an expertise in workouts have helped to lower loss rates during periods of stress compared to public markets. Private debt is generally self-liquidating, providing downside protection and favourable exit guarantees, and its floating rate nature shields it from interest rate volatility, often backed by interest rate floors. The historical maximum drawdown for direct private debt (7.7%2)) is also lower than for public and private market peers. Nevertheless, it is crucial to adequately diversify when allocating to private debt in order to sufficient- ly mitigate left tail risk (see chart).

How do you see private debt relative to other asset classes?

While return dispersion in private debt is lower than in private equity, it remains higher than in public markets. We recommend focusing on private debt managers with long, top-quartile track records over multiple market cycles and in-house workout capabilities. Analysis of transition matrices within the asset class reveals significant resilience among top performers. Rigorous due diligence to assess managers’ expertise, sourcing channels, and alignment of interests is essential, with a multi-step process to help investors make informed decisions about the risks of private debt investments.

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