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The path to building an efficient private debt pension portfolio

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Read the full interview here: https://hub.ipe.com/download?ac=155804

In his interview with IPE, the leading European information source for pension funds and other institutional investors, Shuang Kang, Head of Portfolio Management, examines how pension funds can strike a balance between maximising returns and effectively managing risk by using private debt as an all-weather solution.

The private debt market has grown significantly over the past decade and has become an increasingly important allocation for pension portfolios. This development has increased the complexity of portfolio construction. Klarphos, an alternative asset manager specialising in customised portfolio solutions for institutional clients, manages approximately €2.5 billion in total assets, of which more than half reside in private debt.

What do you consider to be the most important aspect of constructing private debt portfolios?

Private debt offers an attractive risk/return profile, particularly in the current high-base-rate environment, with senior direct lending offering an unlevered net IRR of 10-11%1. Its tighter documentation and stewardship by GPs with an expertise in workouts have helped to lower loss rates during periods of stress compared to public markets. Private debt is generally self-liquidating, providing downside protection and favourable exit guarantees, and its floating rate nature shields it from interest rate volatility, often backed by interest rate floors. The historical maximum drawdown for direct private debt (7.7%2) is also lower than for public and private market peers. Nevertheless, it is crucial to adequately diversify when allocating to private debt in order to sufficiently mitigate left tail risk.

1. This doesn’t account for credit losses. 2. Time period: September 30, 2004 to December 31, 2023.

How do you see private debt relative to other asset classes?

While return dispersion in private debt is lower than in private equity, it remains higher than in public markets. We recommend focusing on private debt managers with long, top-quartile track records over multiple market cycles and in-house workout capabilities. Analysis of transition matrices within the asset class reveals significant resilience among top performers. Rigorous due diligence to assess managers’ expertise, sourcing channels, and alignment of interests is essential, with a multi-step process to help investors make informed decisions about the risks of private debt investments.

Continue to read the interview with IPE here: https://hub.ipe.com/download?ac=155804

Important Information
This article is informative purposes only. It does not constitute research, investment advice nor solicitation to invest in any investment product or service that Klarphos offers or may offer in the future in any jurisdiction. The information contained herein is based on projections, estimates and/or other financial data and has been prepared internally by Klarphos. Opinions expressed therein are current opinions as of the date of this document only and are subject to change at any time without notice.
No representations are made as to the accuracy of the observations, assumptions, and projections. No subscriptions to any Klarphos products are possible based solely on this document. Any investment decisions should be made in accordance with the legal documentation of a fund such as its offering memorandum.
Klarphos is not entitled to provide any tax, regulatory or legal advice.
Past performance is not indicative of future returns. There can be no assurance that the strategy objectives will be realized or that the strategy will not experience losses. Target returns are hypothetical and are neither guarantees nor predictions of future performance. There can be no assurance that the target returns will be achieved.

Jul 2024

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