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The Journal of Alternative Investments

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The Components of Private Debt Performance

Margherita Giuzio, Andreas Gintschel and Sandra Paterlini
The Journal of Alternative Investments Spring 2018, 20 (4) 21-35; DOI: https://doi.org/10.3905/jai.2018.20.4.021
Margherita Giuzio
is a research fellow in financial econometrics and asset management at the EBS Universität in Wiesbaden, Germany
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Andreas Gintschel
is an expert on private debt investment solutions at Prime Capital AG in Frankfurt, Germany
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Sandra Paterlini
holds the chair of financial econometrics and asset management at EBS Universität in Wiesbaden, Germany and is a professor at the University of Trento, Italy
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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 article, the authors analyze private debt interest rates and the features that are 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, the authors find that they 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. Then, they look for possible diversification opportunities that private debt may offer in asset allocation, and observe 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.

TOPICS: Risk management, fixed income and structured finance, portfolio construction, performance measurement

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The Journal of Alternative Investments: 20 (4)
The Journal of Alternative Investments
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The Components of Private Debt Performance
Margherita Giuzio, Andreas Gintschel, Sandra Paterlini
The Journal of Alternative Investments Mar 2018, 20 (4) 21-35; DOI: 10.3905/jai.2018.20.4.021

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The Components of Private Debt Performance
Margherita Giuzio, Andreas Gintschel, Sandra Paterlini
The Journal of Alternative Investments Mar 2018, 20 (4) 21-35; DOI: 10.3905/jai.2018.20.4.021
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