Joint Research Publication in the Journal of Alternative Investments
In this paper, we estimate the components of private debt performance in Europe, as proxied by historical data on bank loan interest rates. By means of a multivariate regression analysis on interest rates, credit, and market factors, we show that there exists a complexity premium in private debt returns, which appears as a large unexplained residual.
Furthermore, we study the diversification benefits that private debt can offer in strategic asset allocation, thanks to its low correlation with other asset classes. In particular, we find that mean–variance efficient portfolios obtained by investing in private debt are better diversified and achieve higher expected returns for any given level of expected risk than portfolios that do not include private debt.