In Chile, the asset class that has seen the strongest growth over the past four years—and continues to offer the greatest potential—is private debt. From 2019 to the present, we have experienced significant events that have severely impacted traditional assets. It began with a severe social and political crisis, followed by the pandemic, and continues with social, economic, and political uncertainty for which no quick solution is in sight. One of the asset classes that has emerged as a winner during these difficult times is undoubtedly private debt.

Consistently positive returns during times of crisis are the greatest strength it has demonstrated. Returns in this category have averaged around 6% over the past 5 years. This is a standout result compared to fixed income, which posted losses in 2021, the low interest rates on time deposits throughout 2020 and part of 2021, and the historically high volatility currently being seen in equities and currencies in Chile.

This resilience and attractive risk-adjusted returns have led many people to invest in this asset class for the first time. The growth has been incredible. In three years, the size of funds in this asset class has more than doubled. The range of funds in this category has expanded, and there are now various strategies available for all types of investors.

So, let's take a look at what Private Debt.

Private Debt Funds are dedicated to providing financing to companies, receiving an interest rate in return, just as a bank does. These loans generally involve collateral to limit the credit risk associated with the financing, thereby ensuring that the funds can recover the principal in the event of a default. This makes them relatively low risk, if managed properly.

What are the advantages of private debt?

• Predictable Returns: This type of asset generally isn’t affected by market conditions, and returns are determined by the interest rates on the loans in the fund’s portfolio, which makes it have predictable returns in the short term.
• Resilience in Times of Crisis: In recent years, it has been shown that this type of asset has maintained positive returns during times of crisis and is a very good alternative for mitigating volatility in an investment portfolio.
• Decorrelation from Traditional Assets: According to various studies, an investment portfolio is more efficient when it combines traditional assets with alternative assets, such as private debt. This allows for improved returns, given a certain level of risk.
•  Wide range of options available: The range of these types of funds has grown significantly. According to data from Acafi, these funds in Chile now manage nearly USD 6,000 million, more than doubling in the last three years.

Private debt funds that invest in Chile, Peru, Mexico, and the United States; funds denominated in dollars, pesos, and UF; short-term funds with durations of less than 3 months and the option to redeem; and other long-term funds seeking a liquidity premium—these are some of the characteristics that can be tailored to the needs of each investor.

It is also possible to choose a fund that invests only in specific assets or in a variety of them. For example, there are funds that invest only in real estate assets, accounts receivable funds, auto loan funds, infrastructure funds, short-term working capital funds, natural resources funds, and others.

Supply continues to grow strongly. The private debt fund market is still in its infancy in Chile and has enormous growth potential when compared to the share that this type of asset holds in private portfolios and pension funds in developed countries. Private debt funds are an excellent option for achieving predictable returns with limited risk. The key is to choose a fund that aligns with the investor’s liquidity and risk preferences, as well as to select a trusted and experienced manager who will manage the investment portfolio intelligently and responsibly.

By: Matías Castro