Skip to content

Private Markets Pathway · Private Investments and Structures

Private Debt and Real Assets Structures for CFA Level III

Updated 8 October 2026 · Fact-checked

Private debt and real assets structures are non-traded vehicles that lend to companies or own property and infrastructure. To solve exam questions, identify the position in the capital structure or the asset's life stage, link it to risk and return drivers, then match it to the client's objectives and constraints.

Understand Private Debt and Real Assets Structures

Private debt is lending that does not go through public bond markets. A fund or manager lends directly to a borrower, negotiates terms, and holds the loan, often to maturity. Compared with public bonds, you usually get a higher yield, tighter covenants and less liquidity. You are paid for illiquidity, complexity and credit risk.

The main strategies differ by where they sit in the capital structure and what drives their return. Direct lending is senior or unitranche lending, usually floating rate, with return from interest and fees. Mezzanine debt sits below senior debt and above equity. It pays a cash coupon, often with payment-in-kind (PIK) interest, and may include warrants or equity kickers. Distressed debt is bought at a discount from borrowers in or near default. The return comes from recovery value, restructuring or a conversion to equity, not from coupons.

The key contrast: mezzanine is a yield-plus-upside strategy on a going concern. Distressed debt is a value and control strategy on a troubled issuer. Mezzanine risk is subordination and refinancing. Distressed risk is legal outcome, valuation and time to resolution.

Real assets are physical assets that produce cash flows. In real estate, investors can hold direct property, private funds, or listed or debt-based forms. Return comes from income and appreciation, and leverage magnifies both gains and losses. Infrastructure covers assets like toll roads, utilities and energy. Cash flows are often long-term, contracted or regulated, and may be linked to inflation. Greenfield projects involve construction risk and higher return potential. Brownfield assets are operating, with steadier income and lower risk.

In every case, tie the structure to the client. Check the liquidity need, return target, time horizon, income need, inflation sensitivity and risk tolerance. A vehicle that looks attractive on yield may still fail the client's constraints.

Key rules to remember

Capital structure ranking
Senior secured > unitranche/senior > mezzanine > equity (priority of claim, highest first)
Higher priority means lower risk and lower expected return. Unitranche blends senior and junior risk into one loan at a blended rate.
Leveraged return on equity
Levered return = Asset return + (D ÷ E) × (Asset return − Cost of debt)
Applies when the return and cost of debt are in the same period, ignoring taxes and fees. Leverage cuts both ways when the asset return falls below the cost of debt.
Direct capitalization value
Value = NOI ÷ Cap rate
Use stabilized NOI. A higher cap rate means a lower value for the same NOI.
Debt service coverage ratio
DSCR = NOI ÷ Debt service
Higher means more cushion. Lenders use it to test whether property income supports the loan.
Loan-to-value ratio
LTV = Loan amount ÷ Property value
Lower LTV means more equity cushion for the lender.
Distressed debt return source
Return ≈ (Recovery value − Purchase price) ÷ Purchase price
A simplified view that ignores interim cash flows, costs and time value. Timing of recovery matters for annualized return.

How to solve Private Debt and Real Assets Structures questions

Use this sequence for any question on private debt, real estate or infrastructure vehicles.

  1. 1Read the command word and the client details first. Note the objectives (return, income, inflation protection) and constraints (liquidity, horizon, risk).
  2. 2Identify the strategy or vehicle and where it sits: capital structure position for debt, or life stage and form for real assets.
  3. 3List the main return drivers: coupon, fees, PIK, equity kicker, recovery, rent, appreciation or contracted cash flow.
  4. 4List the main risks: credit, subordination, illiquidity, leverage, construction, regulatory, valuation and refinancing.
  5. 5Do any calculation (NOI ÷ cap rate, DSCR, LTV, levered return) and show each step with units.
  6. 6Compare the strategy to the client's objectives and constraints and state a clear conclusion.
  7. 7Support the conclusion with one or two specific reasons in the fewest words that match the command word.

Quickest way: Position, driver, fit

When to use it: Use it for item set questions that ask which strategy or vehicle is most suitable or which statement is correct.

  1. Position: where is it in the capital structure, or is the asset greenfield or brownfield?
  2. Driver: is the return from income, upside, recovery or growth?
  3. Fit: does the liquidity, horizon and risk match the client? Eliminate options that fail one constraint.

Common mistakes in Private Debt and Real Assets Structures

  • Treating mezzanine and distressed debt as the same thing.

    Both are higher-risk debt below senior loans.

    Fix: Mezzanine is subordinated debt to a going concern with coupon and upside. Distressed debt is bought at a discount from stressed issuers for recovery and control.

  • Assuming leverage always raises returns.

    Students remember the boost in good years.

    Fix: Leverage raises returns only when the asset return exceeds the cost of debt. Otherwise it magnifies losses.

  • Calling all infrastructure low risk.

    Operating utilities and toll roads are stable, so the label gets generalized.

    Fix: Greenfield carries construction, ramp-up and demand risk. Brownfield is usually steadier. Always state the stage.

  • Ignoring illiquidity in the recommendation.

    Focus on yield and diversification.

    Fix: Check the client's liquidity needs and horizon before recommending any private vehicle.

  • Using the wrong direction for cap rates.

    Rushing the division.

    Fix: Value = NOI ÷ cap rate. If the cap rate rises, value falls. Sanity check the direction before writing the answer.

Worked examples

Example 1

A stabilized property has annual NOI of ₹4,80,00,000. The market cap rate is 8%. A lender offers a loan of 60% of value with annual debt service of ₹2,40,00,000. Calculate the value, the loan amount and the DSCR.

Show the solution
  1. Value = NOI ÷ cap rate = 4,80,00,000 ÷ 0.08 = ₹60,00,00,000.
  2. Loan = 60% × 60,00,00,000 = ₹36,00,00,000.
  3. DSCR = NOI ÷ debt service = 4,80,00,000 ÷ 2,40,00,000 = 2.0.

Answer: Value is ₹60,00,00,000, the loan is ₹36,00,00,000 and DSCR is 2.0.

Example 2

A fund buys a property with 50% debt. The property returns 9% and the debt costs 6%. Calculate the levered return on equity, and state what happens if the property return falls to 4%.

Show the solution
  1. D ÷ E = 50 ÷ 50 = 1.0.
  2. Levered return = 9% + 1.0 × (9% − 6%) = 12%.
  3. If the asset return is 4%: 4% + 1.0 × (4% − 6%) = 2%.
  4. Leverage reduced the return because the asset return was below the cost of debt.

Answer: The levered return is 12%. If the asset return falls to 4%, the levered return is 2%, below the unlevered 4%.

Exam tips

  • When asked to distinguish strategies, state the capital structure position and the main return source in one sentence each.
  • For real asset questions, name the life stage (greenfield or brownfield) and link it to risk and cash flow certainty.
  • In essay sets, answer exactly the command word: identify means name, justify means give a reason tied to the client.
  • Show every calculation step. Check cap rate direction and that the leverage formula uses consistent periods.
  • Always close a recommendation with the client's liquidity and horizon constraints.

Private Debt and Real Assets Structures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Private Debt and Real Assets Structures: frequently asked questions

What is the difference between mezzanine and distressed debt?

Mezzanine debt is subordinated lending to a going concern, paying a coupon and often giving equity upside. Distressed debt is bought at a discount from borrowers in or near default. Its return depends on recovery or restructuring.

Why do private credit funds usually offer higher yields than public bonds?

Investors are compensated for illiquidity, complexity and often less standardized credit risk. Lenders can also negotiate covenants and fees. Higher yield is not free money, because losses can be larger and exits are harder.

How is greenfield different from brownfield infrastructure?

Greenfield means building a new asset, so it has construction and ramp-up risk with higher return potential. Brownfield means an operating asset with more predictable cash flows and typically lower risk.

How do I analyse a private credit fund?

Start with strategy, position in the capital structure and the return source. Then review leverage, covenants, diversification, manager track record and fees. Finish by testing fit with the client's liquidity and risk constraints.