This article was written in collaboration with Maxence Louvrier.
Private debt investment is the allocation of capital in private structures’ debt with the expectations of generating a positive return. The market is comprised of a vast array of structures’ debt, ranging from listed companies to infrastructure through real estate. This versatility is one of the many strengths of private debt as an investment vehicle, for it allows to diversify one’s investment into different channels, which usually requires the same technical while mitigating risk.
The growth of the private debt market has been spectacular in the past two decades: starting from a total of assets under management of USD 30 bn in 2000 to an impressive value of USD 812 bn in 2020. This industry is in constant evolution with more than 4000 active investors nowadays.
Private debt can be tailored to the investor’s values, risk aversion and returns expectations by navigating between the market allocation, debt structure and strategy. Investors can in fact diversify with relation to the type of debt they wish to allocate their capital to: senior, unitranche, subordinated, and finally, mezzanine (cited in ascending risk). This risk is determined by the fact that some forms of debts will be prioritized for reimbursement in case of bankruptcy, coming from the capital structure. Thereby, senior debt would be paid before unitranche debt, and so on. This risk allocation obviously leads to a different interest allocation: senior being the least lucrative and mezzanine the most. Thanks to these features, private debt can easily offer a return on investment of a minimum of 8%, and it can go up to higher values with mezzanine or special situations debt. Besides offering portfolio diversification by allowing capital placements in various sectors of the economy, which can be independent from one another, private debt investments will also limit the effect of cyclical economic downturns thanks to their non-correlation to traditional assets.
Private debt is a tremendous alternative to fixed income funds as it provides a predicted and contracted rate of return based on the interests generated from the loans. However, selecting the wining deals can be a complex task for private investors which has led to the emergence of dedicated lending funds. Among those, Katch Investment Group has specialized itself in Senior-Secured Direct Lending and counts with a strong team of experts who boast several years of experience in the credit industry. Each investment opportunity must go through a thorough due-diligence process including proper review of the offering, collateral verification, on-site visits, and investment monitoring through its life period. Katch’s funds also have the particularity of being open-ended funds, meaning that investors can easily get in and out without having to sacrifice returns.
Chart: Katch Funds vs Katch Open Ended Private Debt Index* accumulated returns as of December 31, 2020
*The Katch Open Ended Private Debt Index – (KOEPI) seeks to measure the net of fee performance of funds operating in the private debt space. This equal-weight index, composed of 17 independent funds, looks to represent the performance of short-term lending strategies including, but not limited to bridge loans, factoring, trade finance, life insurance settlement, and other forms of short-term asset backed lending.