Systematic Approach to Private Debt Allocation

This technical report outlines a systematic framework for optimizing private debt allocations within institutional portfolios. The document presents three main components: first, it models risk and return considerations for a diverse range of private debt assets, proposing net credit spread and credit stress loss as effective measures. Second, it identifies the ideal composition of private debt portfolios at various target return levels through a robust optimization approach, illustrated by a case study that integrates private debt into a traditional 60/40 portfolio. Lastly, the report discusses implementation strategies for private debt allocation, emphasizing dynamic and opportunistic levers to enhance risk-reward profiles. The paper also highlights the growing institutional interest in private debt as an asset class, noting its potential for attractive returns and diversification, while addressing the complexities and unique market dynamics that require active monitoring. Overall, the report aims to provide clarity on the private debt landscape and assist investors in tailoring allocations to their specific needs.