Private Debt: Yield, Safety and the Emergence of Alternative Lending

by Stephen L. Nesbitt

An essential resource for creating outsized returns in the private debt markets In Private Debt Finding Yield in a Zero Interest World , renowned investment advisor and industry leader Stephen Nesbitt delivers yet another essential resource for investors seeking to acquire private debt options in the investment market, including corporate direct lending, asset-backed lending, mezzanine lending, royalties, venture debt, structured credit (CLOs), specialty finance, and structured equity. Building on the success and popularity of Private Opportunities in Corporate Direct Lending , this latest edition of the author’s flagship text helps readers understand this complex and rapidly growing asset class. The book also A can’t-miss resource for serious investors looking for opportunities to earn higher yields than those offered by traditional index funds while still retaining reasonable safety of principle and liquidity, Private Debt II will undoubtedly become the go-to guide for anyone looking for tried and tested debt investment strategies.

Genres: Finance

320 pages, Hardcover

Published February 7, 2023

Reviews

[JC NoKey · Rating 3 out of 5]

Private debt return = income - realized gains (losses) - unrealized gains - fees

INDEXING
CDLI meets five of the six criteria and falls short to a degree on invest-ability because of its gross-of-fee calculation. The CDLI could be adjusted for fees, however, by deducting an appropriate tee rate. By contrast, an equivalent public benchmark, such as the Morningstar LSTA US Leveraged Loan 100 Index, falls short on the appropriate criterion, meaning the broadly syndicated loans within the Morningstar LSTA US Leveraged Loan 100 Index are not middle market loans that are appropriate securities for the direct loan manager's portfolio. Fund universes and composite returns based on them fall short on the investability and reflective criteria. Some private funds in the universe are not available to investors and, there-fore, not investable. Also, private fund holdings are considered intellectual property by the managers and not disclosed. Therefore, managers have no information about the underlying holdings against which they are being evaluated.

Fee COIs Direct Lending

The first is charging incentive fees on interest income, the primary source of private debt return that reflects payment to the lender for taking credit risk. There is no reason for incentive fees to be earned on earnings that reflect the return to beta, in this case credit risk. Further, such a structure is only going to incentivize the lender to take more credit risk so as to get greater yield and, hence, incentive fees. Better that the lender receives incentive compensation for avoiding or minimizing losses, though unfortunately such fee structures are rare. What is worse is BDCs typically have separate incentive fees for income and gains (losses). This means BDC lenders potentially can incur damaging credit losses and still collect an incentive fee on income.
• Second is the majority of lenders charge fees on gross assets rather than net assets. This gives the lender an incentive to prioritize leverage to maximize management fees, doubling the amount for the average man-ager. Similar to (1), the incentive is to take risk.
• Third is lender incentive fees generally have a low hurdle rate, less than unlevered loan yields, with a 100% catch-up after meeting the hurdle.
In private equity the catch-up generally equals 50%. This again encourages the lender to maximize yield sufficient to earn the entire catch-up and nothing more. Such a severe fee step up and step down can lead lenders to make decisions that are not in the investor's interest.

[Juan Flores · Rating 5 out of 5]

I was looking to learn more about the asset class given its relevance and popularity and this book turned out to be exactly what I needed. Private debt has been gaining market share due to commercial bank failures, increased regularization and outstanding risk/return. The book will lead you to know the asset class in detail, how to evaluate its managers, how it will perform in different situations and against other asset classes, and the growth it will have in this "golden decade" for private credit. I highly recommend it.


Buscaba aprender más de la clase de activo dado su relevancia y popularidad y este libro resulto ser exactamente lo que necesitaba. La deuda privada ha ido ganando participación de mercado por fallas de bancos comerciales, aumento en regularización y riesgo/retorno sobresaliente. El libro va a llevar a que conozcas a detalle la clase de activo, como evaluar los managers de esta, como desempeñara en distintas situaciones y contra otras clases de activos y el crecimiento que va a tener en esta "decada de oro" para el credito privado. Lo recomiendo mucho.

[Sergio Padilla · Rating 4 out of 5]

Stephen Nesbitt’s private debt is probably the most informative text one can access as of writing this review.

It’s bland, and reads as a mix between an instruction manual and an advanced college mathematics textbook but it will leave you with a better understanding of private credit than you came in with.

The book is primarily written for an institutional investor in mind and so if your pension or endowment is considering an allocation to private credit you may want to give this book a try.

[Brim_berries · Rating 5 out of 5]

This is both a fantastic overview of private credit and a thorough explanation of the key concepts that matter.