Private debt misconceptions

Introduction

Although private debt first emerged as an asset class in the 1990s, it did not gain momentum until after the Global Financial Crisis (GFC) at which point it began capturing market share from traditional banks and public markets. Initially regarded as a return enhancer for fixed-income portfolios in low interest rate environments, private debt has since evolved into a core component of institutional portfolios.

However, as more capital flows into private debt, some worry that its growing popularity might be masking risks that could destabilize the broader economy. These concerns largely stem from the perceived opacity associated with private markets. While that is true, private debt has become more transparent: Business development companies (BDCs) and interval funds now offer regular reporting on holdings and performance.

The rise of private debt is the result of an organic growth fueled by private lenders capitalizing on favorable market conditions. Unlike traditional banks, which have historically been the primary financing sources for middle-market companies, private debt funds are generally less vulnerable to market fluctuations. As a result, they do not pose the same level of systemic risk to the economy.

In this white paper, we explore five misconceptions often brought up when discussing private debt’s rise. By doing so, we highlight private debt’s potential as a valuable addition to traditional portfolios and the broader economy.

Read the paper