QFIP-146: Private Debt in an Institutional Portfolio

Question 1

Describe private debt

Answer 1

• Private debt is similar to a loan in that it is capital provided to an entity in exchange for both:
  
  1. Interest (and possibly other payments)
  2. Return of the original principal at a defined point in the future
• Encompasses corporate debt, real estate debt, and infrastructure debt
• Typically secured, has various protections/covenants in place
• Not widely held, and is customized to the borrower’s requirements
• Illiquid. Essentially, investors are offering liquidity to the market in exchange for earning an illiquidity premium
• Typically sub-investment grade (i.e. junk)

Question 2

State the Three Steps of the Private Debt Investment Process

Answer 2

1. Program Design
   
   • Strategic asset allocation, portfolio construction, investment platform structuring, cash flow planning. Additionally, other security characteristics need to be considered as well, including category/seniority, region/currency, managers/deals, time/market opportunites
2. Implementation
   
   • Implementation includes fund sourcing and screening, investment/legal due diligence
3. Ongoing Tasks
   
   • Ongoing tasks include monitoring and reporting

Question 3

Compare the characteristics of private debt, high-yield bonds, and senior bank loans

Answer 3

Question 4

Compare sample target returns of private debt, high-yield bonds, and senior bank loans

Answer 4

Question 5

Compare sources of return of private debt, high-yield bonds, and senior bank loans

Answer 5