Empirical Review of Risk-Adjusted Return Metrics in Private Credit Investment Portfolios

• Author(s): Blessing Olajumoke Farounbi; Chizoba Michael Okafor; Esther Ebunoluwa Oguntegbe
• Paper ID: 1711097
• Page: 494-505
• Published Date: 31-10-2019
• Published In: Iconic Research And Engineering Journals
• Publisher: IRE Journals
• e-ISSN: 2456-8880
• Volume/Issue: Volume 3 Issue 4 October-2019

Abstract

Private credit has emerged as a pivotal asset class within institutional investment portfolios, offering enhanced yield potential, diversification benefits, and exposure to non-traditional credit markets. However, the illiquid and heterogeneous nature of private credit instruments poses significant challenges in accurately assessing performance relative to risk. This presents an empirical review of risk-adjusted return metrics employed in private credit investment portfolios, examining their effectiveness in capturing both the returns and the inherent risks associated with diverse debt strategies, including direct lending, mezzanine financing, and distressed debt. This evaluates widely applied metrics such as the Sharpe ratio, Sortino ratio, Information ratio, and alpha-beta decomposition, highlighting their respective strengths and limitations in the context of private credit. Emphasis is placed on metrics that account for asymmetric return profiles, downside risk, and the illiquidity premium that often characterizes mid-market lending and non-syndicated debt. The study also considers methodological challenges, including data availability, survivorship bias, and difficulties in benchmarking across heterogeneous portfolios. Empirical evidence from historical fund performance indicates that risk-adjusted returns in private credit are influenced by instrument type, leverage, sectoral concentration, macroeconomic cycles, and regional market conditions, with notable variation across developed and emerging markets. Findings suggest that while traditional risk-adjusted metrics provide valuable insights, they may inadequately capture idiosyncratic risks and liquidity constraints inherent in private credit. The study underscores the importance of incorporating scenario analysis, stress testing, and performance benchmarking when evaluating portfolio outcomes. Overall, this empirical review highlights the critical role of risk-adjusted return metrics in guiding allocation, monitoring, and investment decisions in private credit. It emphasizes the need for iterative refinement of performance measurement approaches, including the development of customized metrics that integrate liquidity considerations, default risk, and ESG factors, to support more informed and resilient portfolio management strategies.

Keywords

Risk-Adjusted Returns, Private Credit, Portfolio Performance, Sharpe Ratio, Sortino Ratio, Information Ratio, Alpha, Beta, Treynor Ratio, Value-At-Risk, Portfolio Diversification, Credit Risk Assessment, Return Decomposition, Active Management Evaluation, Benchmark Comparison

Citations

IRE Journals:
Blessing Olajumoke Farounbi, Chizoba Michael Okafor, Esther Ebunoluwa Oguntegbe "Empirical Review of Risk-Adjusted Return Metrics in Private Credit Investment Portfolios" Iconic Research And Engineering Journals Volume 3 Issue 4 2019 Page 494-505

IEEE:
Blessing Olajumoke Farounbi, Chizoba Michael Okafor, Esther Ebunoluwa Oguntegbe "Empirical Review of Risk-Adjusted Return Metrics in Private Credit Investment Portfolios" Iconic Research And Engineering Journals, 3(4)