Private Debt vs. Public Market Performance

by Jaysul Mistry

  • 05 Jun 2018
  • PD

Private Debt has continued its rapid emergence as an asset class, growing in importance for both investors and fund managers alike. From a performance perspective, this appetite has been justified, with the industry  close to outperforming the public market across successive years.

Preqin’s Cash Flow module features since-inception net quarterly cash flows for over 4,200 unlisted vehicles, almost 400 of which are private debt funds. As shown below, by analyzing these cash flows against the public market (modelled by the S&P 500 TR index) using the Kaplan Schoar PME methodology, there is improvement in relative recent performance.

Investors may find PME scores more appropriate than comparing the net IRRs of funds within their peer group, as the timing and size of transactions in a private debt fund are matched with hypothetical investments into an appropriate public market index. KS-PME calculates a ratio between the two (actual vs. theoretical) streams of investments, with values exceeding one highlighting cases where the private return has outperformed the hypothetical public return.

The current unlisted private debt asset class, as shown in the chart above, has generally underperformed the public market across all three time periods through to September 2017 falling short of the public market equivalent return. It appears that over shorter time horizons the private debt industry has come closest to outperforming the public market, which is reflective of the recent success and continued development of the industry into an established asset class in the alternatives space.

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