Private Debt

CHAPTER 7Credit as a Separate Asset Class

Investors are just beginning to identify credit as a separate asset class, driven by expanded and attractive post–global financial crisis (GFC) credit opportunities, and as an alternative to the low yields currently found in traditional fixed income.

Historical data shows that credit has favorable and sustainable return and risk characteristics that are differentiated from other asset classes, favoring a separation from traditional fixed income in asset allocation studies. In this chapter traditional mean–variance analysis is used to show that optimal allocations to credit range from 10% to 20% for most institutional investors, and that roughly two‐thirds of the funding for a credit allocation should come from fixed income, with the remainder from equity.

Investors enjoy an increasing range of credit opportunities, particularly private offerings, when constructing a credit portfolio. Many of these private credit opportunities are cataloged below and our earlier findings suggesting a 3–4% higher return for private credit when compared to public credit are reviewed in the context of asset allocation.

For much of the past 40 years investor exposure to credit has been mostly indirect, through allocations to fixed income strategies replicating or tracking broadly diversified benchmarks such as the Bloomberg Barclays Aggregate Bond Index.¹ Today, credit‐related securities, primarily corporate bonds, represent 28% of the market value of the ...