Private credit generally refers to loans and other debt instruments that are negotiated directly between a borrower and a non-bank lender.
What Role Can Private Credit Play in a Portfolio?
Private credit investments have historically offered higher yields compared to traditional fixed-income securities. These higher yields can potentially provide a significant income boost to a portfolio, helping investors generate more cash flow to meet their financial goals.
Private credit can add diversification benefits to a portfolio. Unlike publicly traded assets, which are often correlated with broader market movements, private credit investments may have lower correlation to traditional asset classes. This can potentially help reduce overall portfolio risk and enhance risk-adjusted returns.
Private credit investments are typically illiquid, meaning they cannot easily be sold or exchanged for cash. Additionally, private credit investments are not traded on public exchanges. This illiquidity can potentially lead to reduced price volatility compared to publicly traded assets.
Private credit allows investors to access niche markets and sectors that are not typically easily accessible through public markets. This can provide exposure to compelling investment opportunities and potentially higher returns.
Private credit investments, especially those tied to real assets or floating-rate strategies, can serve as a hedge against inflation. Inflation typically erodes the purchasing power of fixed-income investments, making certain private credit assets potentially more attractive in periods of high inflation.
Insights From the PM’s Desk
"In an unusual shift, the Fed is cutting rates while defaults remain low—making it easier for borrowers to thrive."
Private Credit is an Evolving Financing Market
Historically, senior-secured debt was financed primarily by banks, whereas private lenders provided financing for mezzanine debt and preferred equity—further down the capital structure. Today, Private Credit is a meaningful financing provider up and down the capital structure.
Source Preqin as of 9/30/2024. For Illustrative purposes. There is no assurance any trends will continue.
While many think of private credit as only direct lending, the private credit universe is vast, dynamic, and brimming with potential opportunities across a wide spectrum of sectors and strategies. Diversifying your credit exposure may help reduce portfolio volatility and harness a broader range of opportunities.
Trending Topics in Private Credit
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Flash Concepts
Conditions set in a loan agreement that a borrower must follow to maintain good standing. Designed to protect the lender in case the borrower hits financial trouble.
Refers to the layers of different types of capital, such as debt and equity. Each layer has a different level of risk, potential returns, and priority for receiving payments. In most cases, senior secured debt sits at the top of the capital stack, while common stock sits at the bottom of the capital stack.
Debt backed by collateral that typically sits at the top of the capital stack and is first in line for repayment in the event of a default.
A hybrid loan structure that combines senior and subordinated debt into one single loan with a blended interest rate. This simplifies the borrower’s capital stack and may offer a potential yield premium to lenders.
The risk that an asset’s price may be sensitive to changing interest rates. This primarily affects fixed-income securities.
A collateralized loan obligation (CLO) is a security backed by an actively-managed pool of senior secured loans which are packaged and sold off in tranches to investors.
The purchase of diversified pools of hard and financial assets or the lending against quality assets with contractual cash flows.
Non-bank lending to a company or individual.
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