Private Placements can offer fixed income investments with enhanced diversification, risk-adjusted yield and downside mitigation, and as demand grows, we believe investors could benefit from an independent route into the market that is better aligned with their needs.

Many investors access the market via managers affiliated with large insurance companies. In this paper, we explain why we think non-affiliated asset managers get to see more transactions, and can tailor portfolios that are better aligned with investors’ specific needs.

Executive Summary

  • We believe Private Placement Debt has three major advantages over public markets:
    – Greater diversification: Corporate issuance is complemented by significant project finance, infrastructure, real estate debt and asset-backed issuance.
    – Higher risk-adjusted yield potential: Typical liquidity and complexity premiums can generate significant additional spread relative to comparable public credits.
    – Enhanced downside mitigation: In the small number of historical defaults, investor-friendly covenants and other protections are associated with higher rates of recovery relative to public bonds.
  • We view Private Placements as a natural buy-and-maintain asset to match the long-dated liabilities of life companies, pension plans and endowments, but the yield pick-up makes them potentially attractive to many other types of eligible investor.
  • Allocations remain relatively modest, on average, even for the life insurance investors that have traditionally dominated the market; considering Private Placements as an extension of investment grade credit portfolios could incentivize larger allocations.
  • In our view, accessing the market through an independent asset manager, rather than a manager affiliated with a large insurance company, brings considerable advantages.
    – An independent manager needs to put less capital to work: It may be better equipped to consider smaller, more complex or more idiosyncratic transactions.
    – An independent manager is not buying Private Placements for its own balance sheet or liability-matching needs: It can dedicate itself to sourcing paper that is better aligned with investors’ specific needs.
  • We believe now is an opportune time for all types of eligible investor to consider Private Placement Debt for their portfolios, and to reconsider how they access this market.

How to Get the Most From Private Placement Debt

Source: Public: Bloomberg (Single A and BBB Corporate Indices); Private: Bank of America. Data for March 2020 is excluded due to the short period without private market transactions during the initial implementation of worldwide COVID-19 restrictions. For illustrative purposes only. Historical trends do not imply, forecast or guarantee future results.