Wednesday, May 9, 2012

Investment in Private Debt Securities

Investment in Private Debt Securities

Investment in Private Debt Securities

Authors

Introduction

 

The objective in investing in private placement securities is to capture a liquidity premium relative to comparable public bonds while structuring the portfolio to effectively manage risk.

 Private placement securities are privately negotiated loans that are negotiated directly between a borrower and a lender. Frequently, the lender has access to private information about the borrower that helps the lender understand the company, its objectives and financials. Private placement securities are less liquid than publicly traded bonds. Investors demand a premium beyond the credit risk premium to compensate them for this illiquidity.

 In addition to the income bonus investors earn from the liquidity premium, investors in private placements benefit from the protection of covenants that many of these deals contain. These covenants, negotiated during the private placement lending process, are a key way to make sure lender interests are protected.

 The private bond market, due to less liquidity, has a longer-term view resulting in a greater emphasis on fundamental credit research. In general, private performance is driven through consistently capturing the liquidity premium while generating long-term positive credit performance as we develop a portfolio of well-structured securities. With low market turnover, technical trades are of less priority.

 

References

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http://knol.google.com/k/-/-/2utb2lsm2k7a/203

Narayana Rao - 14 May 2011

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