Optimising for uncertainty: Private debt's role in institutional investor portfolios

This paper examines the strategic role of private debt within institutional portfolios, with a particular focus on its contribution to portfolio defensiveness, diversification and robustness.

Building on our earlier research into private market asset allocations, we explore how private debt—especially in the form of IFM’s Private Debt Portfolio (PDP)—can enhance risk-adjusted returns across varying investor risk appetites.

Our analysis is motivated by the growing institutional interest in private credit, driven by its potential to deliver stable income, downside protection, and diversification benefits in an increasingly uncertain macroeconomic environment. Using a utility-maximising framework, we construct optimal portfolios for three representative investor types—Defensive, Balanced, and Growth—and assess the impact of introducing private market exposures, including private debt, infrastructure, real estate, and equity.

Key findings include:

• Private debt plays a foundational role in defensive portfolios, offering superior risk-adjusted returns compared to traditional fixed income and other private market assets.

• IFM’s PDP consistently outperforms generic private debt benchmarks, due to its conservative risk profile, sectoral diversification, and disciplined portfolio construction.

• Diversification benefits are most pronounced for risk-averse investors, with diminishing marginal utility as risk appetite increases and allocations shift toward higher-growth alternatives.

• Portfolio construction within private debt matters—the choice of strategy and underlying exposures significantly influences the magnitude of performance enhancement.

• The results reinforce the case for a more prominent strategic allocation to private debt, particularly for investors seeking to enhance portfolio resilience amid evolving market dynamics.