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ERROR: type should be string, got "https://www.barrons.com/articles/the-search-for-yield-leads-to-private-debt-1429935385\nThe Search for Yield Leads to Private Debt\nAmey Stone\nApril 25, 2015 12:16 am ET\nThe search for yield is going even farther afield: Investors are being sold private debt.\nThe selling point is obvious—private-debt funds yield up to 10% to 12% a year. But they’re far from simple. Similar to private-equity funds, private-debt funds make direct loans, or buy the existing loans, of mostly private companies. These funds are usually set up as partnerships, where only qualified investors can get in, and assets are locked up for 10 years.\nThe underlying loans usually have floating rates, which adjust as interest rates change—good news for investors as rates rise. Loans are higher in the capital structure than bonds, which makes them lower risk than high-yield bonds.\n“These options have always been around, but they are more powerful today because of the low interest-rate environment and nervousness about when the Fed will raise rates,” says Adam Taback, deputy chief investment officer for Wells Fargo’s private bank.\nBut private-debt funds are mainly the purview of institutional investors and investors with at least $5 million in investable assets. Private wealth firms may make this strategy available to investors who qualify, but only as a supplement to a more traditional fixed-income strategy, says Taback, who advises that no more than 5% to 15% of a portfolio be invested in private-debt funds.\nTHE MAIN PROBLEM is that private debt is illiquid. “These funds shouldn’t be the hub of a fixed-income allocation,” Taback says, “but can be used to navigate the current environment and for some extra yield.”\nTaback’s cautious take is sensible, even for not-so-high-net-worth investors. For them, there are a growing number of products that make private debt accessible to everyone. These products come in a variety of flavors, each with its own very particular set of risks and benefits.\nFor starters, there are business-development companies, known as BDCs. BDCs are public companies that trade on stock exchanges and are in the business of making loans to midsize companies. Some investment managers don’t like the BDC structure—they can have high fees and come with hidden risks. They do, however, yield around 10%, and have a better track record for solvency in the financial crisis than banks. Investors can invest in BDCs directly; there are a handful of mutual funds and exchange-traded products, but they’re tiny.\n“A big reason why we’ve seen the BDC market grow tenfold in the past 10 years is that the withdrawal of banks from this marketplace has created an opportunity,” says Grier Eliasek, president of Prospect Capital (PSEC), which is a BDC itself. “But investors have to be mindful about what kind of deals nonbanks are doing, as well as the amount of leverage.”\nBANK-LOAN FUNDS, also known as floating-rate funds, are open-end mutual funds and exchange-traded funds that buy the more liquid loans of large high-yield companies, often issued as part of a merger. There are also ETFs, such as PowerShares Senior Loan (BKLN).\n“We look at the larger, more liquid part of the market,” says Stephen Casey, who manages the Neuberger Berman Floating Rate Income fund (NFIAX), which has a current yield of 4.75%. Two other good bets: Eaton Vance Floating Rate (EVBLX) and RidgeWorth Seix Floating Rate High Income (SFRAX).\nFinally, the new world of peer-to-peer lending is worth a mention. Here, online marketplaces, such as Funding Circle, allow institutions and qualified investors to make direct loans to companies. Others, like Lending Club, act as a platform for unsecured consumer or business loans.\nNo matter what the vehicle: “It’s all about the underwriting,” says Taback. “You need to invest with firms that have established processes and teams.”\nE-mail: amey.stone@barrons.com"