Private Debt allocations increasing but growing complexity requires savvy investors

Dr Daniel Schmidt, CEPRES

The latest CEPRES white paper explores trend developments in Private Debt, based on an analysis of deal level transactional data from the CEPRES Platform, encompassing 12,800 Private Debt deals and over 234,000 cash flow transactions, as well as over 800 Private Debt focused funds, from the millennium through to recent years.

The analysis also investigated whether changes in the US Federal Reserve Funds Rate, which impacts lending costs, also have an effect on the interest earned by Private Debt funds; in other words, Private Debt gross returns.  

In 2008, the Fed cut rates to an annual average of 1.9 per cent to stimulate the economy, with private debt returns increasing to 13.3 per cent Gross IRR and trending upwards to 21.3 per cent in 2009, constituting a clear post-GFC bounce. The recent period between 2016 and 2019 saw a steady increase in Fed rates from an annual average of 0.4 per cent to 2.2 per cent, while median Private Debt returns declined from 15.6 per cent Gross IRR to a low of 10.5 per cent in 2018, followed by an incremental recovery in 2019 to 13.1 per cent.

In Q2 2020, Covid-19 brought a new kind of uncertainty, with interest rates nosediving due to the recession caused by the coronavirus crisis, and it remains to be seen if a pattern emerges. 

CEPRES Chart 1

Source: CEPRES Platform                                 Copyright © 2020 CEPRES GmbH

The white paper provides comprehensive analysis of this growing asset class, laying out its own unique complexities, and what investors need to look out for before committing. 

“As banks must contend with tighter regulations and lending practices, Private Debt might be more important than ever for LP portfolios and especially for private companies," says Dr Daniel Schmidt (pictured), Founder & CEO, CEPRES. "With an appetite for capital allocation to this asset class growing, driving a more competitive environment for GPs and compounded by a coronavirus-driven recession, it remains to be seen whether private debt’s liquidity profile will shift back towards its early era. Before signing LPAs, LPs need to understand not only the fund net returns, but also underlying deal level gross returns, risk, liquidity and then also operating metrics. The CEPRES Platform provides the tools and data, enabling a better and informed investment decision.”

For further reading download the white paper from the Digital Knowledge Hub on the CEPRES Platform

 

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