Private Debt Video: Opportunity for yield and diversification
Private debt offers institutional investors the potential for higher yield, enhanced diversification, and lower volatility. TIAA research shows how two categories of private debt – middle market senior loans and mezzanine debt – increased portfolio risk-adjusted returns as alternatives to traditional asset classes. Watch the Video
Private Debt white paper: The opportunity for income and diversification with illiquid assets
Private debt has emerged as a potential solution for institutional investors confronting low interest rates, rising asset correlations, and volatile markets. The asset class offers the opportunity to enhance diversification and improve risk-adjusted returns when added to stock-bond portfolios. Several categories— middle market senior loans, mezzanine debt, and investment grade private placements—historically combined low correlations, higher yields, and less credit risk than similarly-rated public debt. For buy-and-hold investors, private debt’s illiquidity can be a reasonable tradeoff for a more attractive risk-return profile.
To learn more, read our white paper Private debt: The opportunity for income and diversification with illiquid assets (PDF)
Leveraged loans to middle market companies are senior in the capital structure and rated below investment grade. Historically, they have provided yields higher than broadly syndicated loans and approaching those of public high-yield bonds, with less volatility, lower default rates, and higher recovery rates. A unit of TIAA, Churchill Asset Management’s investment team averages over 20 years of industry experience. The team invests in private “club” loans, which have offered an attractive risk-return profile relative to broadly syndicated bank loans or similarly-rated public debt. Churchill has invested about $5 billion in more than 425 middle market direct loan transactions since 2006.
Usually invested as unsecured subordinated debt or second lien term debt, mezzanine loans are attracting institutional investor interest with advantages over public fixed-income sectors. They typically are used in leveraged buyouts to fill the capital structure gap between the sponsor’s equity capitalization and optimal senior debt levels. Mezzanine loans have offered higher yields reflecting their junior debt position, but they have carried less risk than spreads would suggest due to support from deal sponsors. Risk-adjusted returns have tended to be significantly better than many other forms of private and public debt.
Private placement loans historically have offered higher yields and lower credit risk than traditional fixed-income investments. These loans have a fixed coupon rate and term structure like traditional bonds, but enjoy additional protection through borrower covenants and monitoring. With investment-grade ratings of BBB- or higher, private placements have held a yield advantage over public bonds of similar credit quality and duration. In addition, default and loss rates have been a fraction of those for similarly-rated public debt.
For institutional investor use only
Assets under management as of June 30, 2016.
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The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value. TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit TIAA.org for details.
Please note investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk.
Churchill Asset Management is a registered investment advisor and majority-owned, indirect subsidiary of Teachers Insurance and Annuity Association of America.