In previous research, we took a first look into private debt using Burgiss Manager Universe (BMU) data on nearly 23,000 private loans totaling $2.23 trillion in value. That piece summarized data since 2020 in order to introduce some broad contours of the notoriously opaque private debt market, reporting that private loans are disproportionately floating-rate and senior. With those findings in mind, we can now take a closer look at some of the more actionable characteristics of private loans. In this post, we use spreads as an indication of credit risk to compare loans along three dimensions: seniority, region, and industry.

Seniority

While our earlier blog post reported that more than 80% of private loans are senior, we left open the possibility that a loan’s risk profile is more complicated than payment priority alone.[1] While seniority puts a debt holder first in line for repayment, it does not mean that the loan is low risk—the loan could be to an entity with a high credit risk. Medians suggest a meaningful distinction between senior and mezzanine loan spreads; the median senior loan spread is 7.9%, compared to 11.7% for mezzanine loans. However, there remains a substantial overlap between senior and mezzanine loan spreads, as shown in figure 1. Despite this overlap, it is clear that the riskiest loans are mezzanine and the safest loans are disproportionately senior. Ultimately, there is more to loan risk than just seniority, as evidenced by the mixture of the two in the 5–11% spread range.

*Fig. 1: Density of credit spreads by repayment priority. Vertical lines denote the median spread of each distribution.*

Region

Beyond seniority, we can look at where borrowing companies are located. Figure 2 plots spreads by region, with some geographies omitted due to low loan counts. The median North American entity can borrow at an 8.0% spread, comparable to its Western European counterparts (7.8%). On the other hand, the highest spreads go to the median Pacific entities (12.2%)—higher than in Latin America (12.0%) and Asia (11.8%), but not by much. Notably, the range in medians masks important dispersion within regions. North American entities borrow at a wide range of spreads; in contrast, entities in other regions encompass a fairly narrow range of risk profiles. For a comparison of private loans to their public counterparts, see new research from MSCI, which combines Burgiss loan-level data with MSCI’s loan models.

From our previous research, we know that mezzanine loans constitute a small portion of the private debt market—but this is not true across all regions. While this factor cannot explain the range of spreads to North American entites, borrowing companies in the Pacific disproportionately use mezzanine financing at higher spreads. In contrast, Western European entities are more reliant on low-spread senior loans. However, this leaves much of the noted variance unexplained. Another possible explanation is different borrowing intensity by sector across regions.

*Fig. 2: Each box denotes the 25th, 50th, and 75th quantile of spreads for each region, while the whiskers represent the maximum and minimum values, excluding outliers.*

Sector

Regional dispersion in spreads is partly attributable to the types of entities that are receiving private loans in each region. Figure 3 plots the sectors receiving the most private lending globally, led by Information Technology. We see more variation in spreads by sector than by geography, with the median Utilities entity borrowing at an 11.9% spread, compared to just 7.6% for Health Care and Industrials companies. Some sectors, such as Consumer Discretionary, also include entities that are borrowing at very high and very low spreads. At the margin, this sector risk profile helps to explain some of the regional variation in spreads, as documented in figure 2. North American and Latin American private loans are largely split between entities in relatively safe industries and those in relatively risky industries, creating a range of spreads. Low Western European spreads are largely a result of the region’s borrowing entities concentrating in the lowest-spread sectors: Health Care, Industrials, and Information Technology. In contrast, Asia and the Pacific lend disproportionately to Utilities—the sector with the highest median credit spread. For more on sectoral differences between the private and public markets, see recent research from MSCI.

Conclusion

The opacity of the private debt market can pose a challenge for Limited Partners trying to allocate capital with confidence. Using loan-level data from the BMU, we have documented some important characteristics of the loans held by private debt funds that can help to clarify risks, as well as opportunities for mitigation. While our previous research showed that private loans are concentrated along a couple dimensions—they are disproportionately floating-rate and senior loans—we have also highlighted dimensions along which there is plenty of potential for diversification, including by region and industry.

*The author would like to thank Andrew DeMond, Hamed Faquiryan, and Lue Xiong at MSCI for valuable discussion on the subject.

[1] According to the Burgiss Private Capital Classification System (PCCS), “senior” and “mezzanine” can describe either a private debt fund or the loan itself. For example, a fund where the majority of its investments are senior loans is, by our definition, a senior debt fund.

A Closer Look at Private Debt