Private credit narrative (still) gathering steam

We’re halfway through 2024 and private credit shows no sign of slowing down.

Despite the risks involved, like illiquidity, private credit acts as an important option for RIAs and high-net-worth individuals, because it can diversify a traditional portfolio with stocks and bonds, which has always been an important goal of advisors.

One “glaring reason” for its appeal, says Dustin Thackeray, chief investment officer at Crewe Advisors, is the high return expectations.

“Current yields are well above traditional fixed income instruments,” he says. Another reason is the availability of instruments for clients to access, as this specific asset type has proliferated in the last handful of years.

“You had BDCs for a long period of time and now there are very low minimum and easy to manage evergreen funds or interval funds that are catering to this asset class, which are making it much more easily accessible for financial advisors or even retail investors,” Thackeray added.

For those clients who might be needing additional income, Thackeray noted it can be a great source to do that in order to meet goals and objectives.

Tricia Mulcare, principal at Homrich Berg, says clients like private credit because it makes sense when she tells them “the story of what it is”.

“Private loans higher yield because it's less liquid. They understand it for a piece of their portfolio. They know we're looking to make sure they've got enough liquid cash and bonds to meet that monthly withdrawal requirement,” she says.

Additionally, she says clients feel comfortable investing in the asset class simply because the space doesn't feel “nearly as volatile as the stock market”, especially in the last couple of weeks.

“They know we're locking it up, and it's not guaranteed. If it's floating rate as rates come down, the yields will likely come down with it. There's a chance that the borrowers could default, but we're trusting whichever group we're using to do that due diligence to make sure that it’s a low-risk event for us.”

Evan Rothschild, principal and wealth advisor at Adero Partners, believes that the ability to minimize how many loans could go bad and giving up some of the potential upside to keep losses off the books, is the most important thing.

“You want to have managers that have as much information as possible about their loans and they're not just taking them and looking real quickly and quantitatively,” he says. “You want them to have updated information so that they can react appropriately, ideally, ahead of some problems.”

The percentage of allocation into private credit usually depends on client circumstances and the tolerance of several factors, Thackeray says, noting some clients may not warrant an allocation of private credit if they're in a certain asset type mix. He says a good balance is between 2.5 to 7.5 percent.  

Mulcare, however, doesn’t like to put more than 2 percent of a portfolio into any one fund. She cautions advisors to look very carefully first at the financial plan to understand what the liquidity needs are.

“It might make sense to put it into an IRA where a client’s in their 50s and they’re not planning to draw on it and I know they’re not going to need it. All that income is shielded for taxes,” she says.

At the end of the day, private credit “looks really pretty” in terms of the yield it's producing, says Dayna Kleinman, managing director and head of business development and wealth management solutions at Monroe Capital, noting the asset class is in a higher for longer interest rate environment.

“Folks are getting the benefit of that current income in a really positive way,” she says. “I say we’re in the third inning, because I think there's a lot more opportunity for this asset class to still grow. But where we sit in the marketplace today, it is diversifying their portfolio and providing strong returns.”