Private Debt

CHAPTER 3Performance Comparisons to Other Asset Classes

Little has changed with respect to basic asset‐allocation theory over the past 50 years, since Harry Markovitz introduced portfolio optimization based upon asset return, risk, and correlation. In practice, however, there are many more asset class choices available to investors today, and new asset classes like direct lending are only successful to the extent that they have differentiating investment features compared to other asset classes. A high current yield is the most obvious differentiating feature, but for institutional investors this is not enough to warrant consideration. Direct loans must also demonstrate attractive return and risk characteristics that justify their inclusion into a diversified portfolio of assets. This chapter provides a comparative analysis of return and risk across the major asset classes that direct loans would compete with for inclusion into a diversified portfolio.

Exhibits 3.1 and 3.2 compare direct lending performance, measured by the Cliffwater Direct Lending Index (CDLI), with other private and publicly traded asset classes.

EXHIBIT 3.1 Asset class return and risk, September 2004 to December 2017.

Return	Risk	Return/Risk Ratio	Max Draw Down	Correlations
				Russell 3000	ML T‐bills	Bloom Barc 3–5 yr Tsy	Bloom Barc Aggr	S&P/LSTA	Bloom Barc HY	NCREIF NPI	CDLI	CA US Private Equity
Russell 3000	9.3%	15.1%	0.61	−46%	1.00	−0.10	−0.54	−0.26	0.67	0.76	0.24	0.68	0.76