Alternative credit markets, encompassing private, distressed and infrastructure debt, as well as asset-based lending products, have witnessed significant growth in the aftermath of the financial crisis. New private providers of debt financing have stepped into the void left by banks as they retreat from some of their traditional lending businesses in the wake of regulatory change. While European markets have yet to offer the same diversity of financing options as the US, the move towards a less bank-centric model is a marked one.

Executive Summary

Alternative credit assets hold an intuitive appeal for long-term investors seeking yield and diversification in a low-interest-rate environment. Given the growing interest in the market, it is important to consider the risks inherent in private credit, and how investors are compensated for them. In particular, this PDF addresses the following questions:

  • What exactly is illiquidity risk?

  • How does it manifest itself?

  • How is it relevant for long-term investors?

  • What is the outlook for premia in alternative credit?

  • How do the different market segments vary?

  • What is the role of active investment management in generating returns?

SECTION 1: The Changing Landscape of Corporate Borrowing

  • The search for yield
  • Alternative credit markets

SECTION 2: Premia and Risks in Alternative Credit

  • Decomposing credit spreads
  • Default risk in alternative credit
  • Liquidity and asset pricing
  • Illiquidity and the "patient invest"
  • Transactional liquidity risk
  • Systematic illiquidity risk
  • Other risks

SECTION 3: Gauging the Size of the Illiquidity Premium

  • How large is the compensation for illiquidity?

SECTION 4: The Persistence of Premia

  • Implications for the persistence of premia in alternative credit
  • What about alpha?