What lies behind the real performance promised by this asset class
Private debt has established itself as one of the most attractive asset classes in institutional portfolios, offering returns above traditional fixed income in a higher-rate environment. However, behind the headline annual return figures lie meaningful risks that are not always evident: illiquidity, defaults, and complex structures. In this newsletter, we analyze how private debt funds operate, why they have gained prominence, and which factors must be evaluated through proper investment due diligence in order to integrate them responsibly into a diversified portfolio.
The role of private debt in building a robust wealth strategy
In recent years, private debt has gained prominence as an alternative to traditional fixed income. Increased and more comprehensive regulation, the growing financing needs of mid-sized companies, and a higher-rate environment have created favorable conditions for private debt funds to provide direct lending, typically at rates above those available in public markets. For investors, this translates into attractive returns and lower sensitivity to daily market fluctuations.
Unlike traditional fixed income, private debt (excluding semi-liquid funds) is not traded on liquid markets or exchanges. Loans are usually structured on a bespoke basis, with floating rates, specific collateral, and tighter covenants. This customization explains part of the return premium, but it also introduces a key difference: valuations are not updated daily and liquidity is limited. While a bond can be sold in the secondary market, a private debt position is typically held to maturity or depends on limited redemption windows.
The main risks of this asset class are less visible. Illiquidity is structural and must be aligned with the investor’s time horizon. In addition, there is the risk of borrower default and, more importantly, the recovery rate in adverse scenarios. Not all funds manage these risks in the same way: the manager’s experience, portfolio diversification, collateral quality, and underwriting discipline are critical determinants of final outcomes.
Its growing popularity in institutional portfolios is driven by a clear combination of factors: higher expected returns, lower observed volatility, and low correlation with traditional assets. However, the appeal of an “8.0%” return should not be evaluated in isolation.
Private debt does not replace public fixed income—it complements it by providing an additional source of return for long-term portfolios that can tolerate lower liquidity. The key lies in understanding what is behind the promised yield and integrating this asset class into a coherent framework of risks and objectives.