Introduction

Headline returns are seductive. A double-digit IRR in a private equity fund or high-yield coupon in a private credit note looks attractive on paper. But sophisticated allocators know that returns without context are meaningless. The true measure of performance is not what an investment earns in isolation, but what it earns relative to the risk required to achieve it.

This is the essence of risk-adjusted returns. For family offices and institutional investors navigating private markets, understanding and applying this lens is critical. Without it, investors risk mistaking leverage and opacity for genuine value creation.

The Concept of Risk-Adjusted Returns

Risk-adjusted returns quantify the relationship between risk and reward. They answer the central question: how much return am I achieving per unit of risk taken?

Two assets may both deliver 10% annualised returns. But if one requires exposure to highly leveraged, volatile companies while the other is backed by asset-level collateral with predictable cash flows, their efficiency is entirely different. Risk-adjusted returns strip out the illusion and reveal the underlying efficiency of capital deployment.

Metrics in Public Markets

In public markets, this framework is well established:

  • Sharpe Ratio measures excess return per unit of volatility.
  • Sortino Ratio isolates downside risk.
  • Treynor Ratio assesses returns relative to systematic, market-wide risk.
  • Alpha benchmarks performance relative to a reference index after adjusting for risk factors.

These tools make comparisons straightforward across listed equities and bonds.

The Challenge in Private Markets

Private equity and private credit present a more complex reality. Here, the risk side of the equation is harder to measure, and traditional metrics often fail.

  • Opacity: Information disclosure is limited. Manager reports may emphasise returns while minimising risk detail.
  • Illiquidity: Lock-up periods and lack of secondary market depth create hidden costs that are rarely modelled into returns.
  • Valuation Practices: Private assets are marked infrequently, often using estimates or models that smooth volatility. Apparent stability can mask underlying risk.
  • Data Scarcity: Limited history and irregular reporting reduce the reliability of volatility and correlation metrics.

These factors create a persistent problem: investors may be presented with high nominal returns that do not properly account for structural risks embedded in the asset.

Why Risk-Adjusted Returns Matter for Private Credit

Private credit, in particular, demonstrates why the lens is essential. A 12% coupon on a subordinated, unsecured loan to a mid-market borrower may sound compelling. But compared to an 8% coupon on a senior, asset-backed CLN referencing receivables or NBFI cash flows, the latter may deliver a superior risk-adjusted profile.

Allocators must evaluate:

  • Where in the capital stack the exposure sits.
  • What collateral or receivables back the structure.
  • What governance, reporting, and oversight mechanisms are in place.
  • What default and recovery assumptions are realistic, not promotional.

Nominal yields are easy to market. Risk-adjusted returns require analysis and transparency.

Public vs Private Market Mindsets

In public markets, risk-adjusted performance is enforced by liquidity, benchmarks, and regulation. In private markets, no such guardrails exist. This makes governance frameworks — both at the manager and investor level — the critical differentiator.

Without rigorous analysis, family offices risk being lured by glossy return figures, only to discover hidden leverage, weak collateral, or poor governance when stress arrives.

The Kingsbury & Partners Approach

At Kingsbury & Partners, we frame all private market opportunities through the lens of “regulating the unregulated.” Our Product & Risk Committee evaluates not only the projected returns, but also the true risk drivers beneath them.

We ask:

  • Are returns being driven by sustainable cash flows or financial engineering?
  • How robust are collateral protections, servicing agreements, and covenants?
  • Does the structure provide transparency, regular reporting, and enforceable rights?
  • What are the downside scenarios, and how do they reshape the IRR?

By embedding these questions into every transaction we bring to market — whether in private credit or structured equity-linked deals — we provide our clients and partners with clarity on risk-adjusted outcomes, not just headline figures.

Conclusion

Risk-adjusted returns are not a theoretical metric. They are the only meaningful way to compare investments across public and private markets. For allocators, they provide a disciplined framework to cut through marketing, stress-test assumptions, and build portfolios that are resilient across cycles.

In private markets, where opacity and illiquidity obscure the picture, they are even more vital. At Kingsbury & Partners, our commitment is to bring transparency, governance, and structure to this analysis — enabling family offices and institutional partners to pursue yield and growth with clarity on the risk that underpins it.