-
""

Private debt: all-weather investment solution

04 October 2019

4 minute read

By Gerald Moser, London UK, Chief Market Strategist

After a decade of strong rises in assets under management, can private debt still be attractive for investment portfolios?

The rise of private debt

Since the global financial crisis in 2008, the environment for private debt has been favourable. Assets under management in the area rocketed to $760bn in 2018 from $240bn ten years’ earlier.

Banks were overleveraged in the aftermath of the crisis and spent the following years rebuilding their balance sheets. Furthermore, tighter regulations also limited banks’ appetite to grow their book loans, especially for long-term loans. So there was a need for fresh loans supply and private debt partially filled the gap banks left.

Among investors, there was also an appetite for financing those loans as public markets were offering ever lower yields in the wake of central banks’ quantitative easing policies globally.

Different strategies to fit the economic cycle

Private debt’s attractive risk-return profile is achieved thanks to different sub-strategies offering different exposures to the economic cycle. Senior loans are the most secure part of the capital structure for private debt. They are normally issued for buyout financing as well as growth investing. For this reason, they tend to be popular during the mid-cycle, once the economic environment looks stable and the cycle durable. The purpose of those investments is to minimise risks.

At the other extreme, mezzanine debt is typically unsecured and only senior to equity in the capital structure. In that case, the strategy is less focused on risk reduction and more about return maximisation. Considering the close tie to equity, mezzanine debt usually performs best in the early part of the cycle when the risky assets recover.

Finally, distressed debt is a strategy that requires the economic cycle to enter into a recession or a slowdown for opportunities to arise. With high leverage and defaults on the rise, distressed debt funds are able to buy assets at a discount from companies on the verge of bankruptcy. They create value through a debt-restructuring process. Distressed debt funds tend to be negatively correlated with risky assets such as equities.

Opportunistic credit funds

Opportunistic credit funds offer various exposure to the above three private debt sub-strategies. Managers of those funds have a broader mandate and adjust their main strategy throughout the economic cycle.

Opportunistic credit funds can be used with the aim of yield enhancement or capital appreciation, while also adding a counter-cycle profile to a portfolio.

Attractive outlook and rate hedge

With the stock of negative-yielding fixed income assets close to a record high, private debt still seems to be an attractive addition to a portfolio.

History suggests that the asset class offers an equity-like return, thanks partly to the illiquidity premium, while volatility remains closer to a fixed-income instrument. In addition, private debt offers a hedge against higher rates as private debt is mostly based on floating-rate notes.

History suggests that the asset class offers an equity-like return...while volatility remains closer to a fixed income instrument.

""

Market Perspectives October 2019

Barclays Private Bank investment experts highlight our key investment themes. They show how security selection and a bias to quality companies can provide the yield and outperformance needed at a time when it may be tougher to produce positive returns.

""

We give you versatility and a choice of services

Barclays Private Bank provides discretionary and advisory investment services, investments to help plan your wealth and for professionals, access to market.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.

THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.