Private debt funds are portfolios of loans typically made to small to mid-size companies, or to fund real estate acquisitions. Due to the currently tight and regulated credit markets, many quality companies are unable to obtain necessary financing for projects and expansion, and turn to the private debt markets. Sponsors of private debt due their own due diligence on companies seeking financing and can choose those companies which meet their due diligence requirements and are able to put up the necessary collateral or covenants to qualify for the loan. Due to a shortage of available credit, these private debt funds are able to choose the best options and avail of favorable interest rates which in turn provide return to the private debt investor.
While private debt funds are not liquid exchange-traded securities and entail particular risks, they operate in the same fixed income principle as other debt instruments. The private debt funds brokered by Cornerstone typically provide attractive cash on cash returns, include significant hedges against loan defaults or downside risk, but have limited appreciation potential.