The Returns to Private Debt: Primary Issuances vs. Secondary Acquisitions

Abstract

Private debt fund managers invest in debt positions of private companies through (1) new issuances or (2) secondary acquisition of loans. In the study reported here, we used data from more than 400 investments into private companies in 13 Asia-Pacific markets between 2001 and 2015 to examine which strategy performs best. Conditional on market and industry factors, trading private debt delivers higher returns than buying and holding a primary issuance. So, institutional investors should permit fund managers investment flexibility to trade. Furthermore, a portfolio of private debt investments delivers excess returns to public markets over time, with excess returns affected by volatility, funding liquidity, and the global financial crisis. An investment in Asia-Pacific private debt should improve risk-adjusted returns for a global or emerging market fixed-income portfolio.

Disclosure: The authors report no conflicts of interest.

Editor’s Note

Submitted 15 September 2017

Accepted 9 August 2018 by Stephen J. Brown

Acknowledgment

We owe thanks to the editors and referees for helpful comments and to conference participants at the Moody’s Corporation/Shanghai Advanced Institute of Finance Credit Conference, Shanghai; University of Sussex Business School; York University Schulich School of Business; Asian Finance Association Annual Conference; and Australasian Finance & Banking Conference.

Notes

¹ Aon Hewitt Investment Consulting (2018); Cambridge Associates (2017); Preqin (2016); Roddick (2016); Kidd (2015); Cliffwater (2016); Towers Watson (2015a, 2015b).

² Carey’s (1998) sample is based on 13 major life insurance companies in the United States from 1986 to 1992, but not all companies contributed data for all years, so the sampling raises issues. In our article, we cover a range of countries before and after the global financial crisis, thus providing diversity of legal and creditor systems and time periods.

³ TED stands for Treasury–Eurodollar rate. The TED spread is the difference between the interest rate on short-term US government debt and the interest rate on interbank loans. 

⁴ Winsorizing limits extreme values in statistical data to reduce the effect of possibly spurious outliers.

⁵ To test for differences in investment returns by size, we used ordinary least-squares regressions on size (investment cost) and log of size. The full sample and winsorized samples produced similar results (although with extremely low model-adjusted R²s (approximately 1%–2%) and F-statistics (significant at the 10% level only).

⁶ For details on the methodology involved in calculating the World Bank’s Enforcing Contracts score, see www.doingbusiness.org/Methodology/enforcing-contracts.

⁷ We also estimated models with a dummy variable for realized investments and country dummies for China and India to address the fixed country effects. Our results did not change qualitatively.

⁸ We also estimated models using ROI as the dependent variable. Our results were qualitatively similar to results reported here.

⁹ On private equity, see Nielsen (2008); Dittmar, Li, and Nain (2012); Fan, Fleming, and Warren (2013); Fidrmuc, Palandri, Roosenboom, and Van Dijk (2013); and Tykvová (2017). On private real estate, see Kaiser (2005) and Alcock, Baum, Colley, and Steiner (2013).

¹⁰ With the information provided in the online supplemental material (available at https://www.tandfonline.com/doi/suppl/10.1080/0015198X.2018.1547049), one can replicate the results with alternative benchmarks; of course, alternative benchmarks with greater volatility give rise to findings that are more sensitive to outliers and the period selected.

¹¹ In a recent survey, Preqin (2017) noted that four out of five institutional investors (78%) were not targeting Asia-Pacific private debt in the next 12 months.