Under the combined effects of the decline in interest rates and a political desire to promote disintermediation, end investors are allocating an increasing portion of their assets to the private debt markets.
However, the logic underlying these investments is no longer optimisation within an envelope of illiquid assets. In fact, the successive market shocks in recent years have shown that liquidity was not a binary concept, and that yields on listed bonds sometimes underestimated the scope of that risk. Therefore, compensation for liquidity risk has become a theme across all asset classes. Consequently, the majority of private debt instruments are increasingly being compared to the bond markets. Thus they appear all the more attractive since they can allow investors to benefit from special protective mechanisms (restrictive covenants, financial covenants) and they offer many diversification opportunities on both businesses (acquisition, development, refinancing, general needs, etc.) and direct financing of real assets (aircrafts, real estate, infrastructure, etc.). From this viewpoint, private debt with the ISEs in the European Union can present value, because it offers an attractive risk/return pairing with high premiums (liquidity, origination, etc.) and protective credit documentation for investors.