Private credit delivers alpha over high yield bonds, stocks: study

  • Fintech firm crunches data from nearly 400 private credit funds
  • Complex modelling invested credit income into markets
  • LP needs may be met by private credit

An analysis of 6,284 private credit deals from 385 private credit funds revealed that the asset class could add gross alpha of 12.4 percent compared to both stocks and high yield bonds for an institutional LP, according to CEPRES GmbH, a financial technology provider.

The study involved modeling the cash flow from private credit deals and gauging the return after reinvesting it in global equities or the high yield bond market.

“It was a complex methodology,” said Christopher Godfrey, a senior partner at CEPRES, which operates private investment platforms for private equity. “The number reflect a true, risk-adjusted performance.”

The data may help show the advantageous of private credit investments for pension systems seeking cash flow.

“The nice thing for a pension that may be underfunded is that with private credit, you have current yield,” Godfrey said in a phone call. “They pay income plus the underlying performance of the overall investment over time. Private credit can outperform bonds, high yield debt and in some cases, equities.”

The firm deployed its PE.Analyzer to review data from 6,284 deals. It used regression analysis to calculate the risk-adjusted returns, along with correlation to an underlying market – in this case high yield. The company said the product helps bring technical analysis and tools familiar to public market investors to private market decision makers

For LPs worried about volatility and downward pressure on public markets, PE.Analyzer data shows that private credit can help defend against market risk and enhance a balanced portfolio, the firm said.

“Unitranche and subordinated strategies may be more suitable for investors seeking stronger alpha at the cost of a slight increase in risk, whereas senior strategies are better suited to core fixed income investors who value certainty of returns and low volatility above absolute returns,” CEPRES CEO Daniel Schmidt said in a prepared statement.

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Photo: hen Yuxi (L), introduces analysis software to investors at a “street stock salon” in central Shanghai, China, September 5, 2015. REUTERS/Aly Song