Private Placement Debt – Not All Debt Is Created Equal

Expectations of increased volatility in traditional equities markets is driving many high net worth investors to seek new asset classes whose performance isn’t coupled to the fluctuations of public markets. In many cases, this has led investors into the world of private placement debt.

Like private equity, private placement debt is not traded on the public bond markets, insulating it from the volatility of publicly traded bonds. But while private placement debt can be a good way to diversify your portfolio, not all private placements are created equal, and it’s important for investors to be aware of the differences.

Private debt (such as mezzanine debt or promissory notes) is often used to finance the operations of privately held companies. These investments can provide investors with steady income, but they are often unsecured by corporate assets; this unsecured nature can mean you’re merely swapping exposure to one type of risk for another.

On the other hand, debt investments that are secured by hard assets like real estate can provide investors with greater diversity while also offering important safeguards to protect principal against downside risk. Vehicles such as the WFP Income Fund can provide downside risk protection by only investing in mortgages and deeds of trust in first lien position and focusing on lower loan-to-value ratios.

While private placement debt may be a valuable asset class to add to your portfolio, it’s important to look carefully at the different types of debt available — along with the unique risks and benefits they bring.

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Private Placement Debt – Not All Debt Is Created Equal Expectations of increased volatility in traditional equities markets is driving many high net worth investors to seek new asset classes whose performance isn't coupled to the fluctuations of public markets. In many cases, this has led investors into the world of private placement debt. Like private equity, private placement debt is not traded on the public bond markets, insulating it from the volatility of publicly traded bonds. But while private placement debt can be a good way to diversify your portfolio, not all private placements are created equal, and it’s important for investors to be aware of the differences. Private debt (such as mezzanine debt or promissory notes) is often used to finance the operations of privately held companies. These investments can provide investors with steady income, but they are often unsecured by corporate assets; this unsecured nature can mean you're merely swapping exposure to one type of risk for another. On the other hand, debt investments that are secured by hard assets like real estate can provide investors with greater diversity while also offering important safeguards to protect principal against downside risk. Vehicles such as the WFP Income Fund can provide downside risk protection by only investing in mortgages and deeds of trust in first lien position and focusing on lower loan-to-value ratios. While private placement debt may be a valuable asset class to add to your portfolio, it’s important to look carefully at the different types of debt available — along with the unique risks and benefits they bring.