When clients ask about private credit: How advisors can address common concerns with confidence

Even as access to alternative asset classes expands, affluent clients may feel reluctant to stray from a traditional mix of public equities and fixed income. Concerns are exacerbated by headlines about isolated fund failures, as well as a general lack of knowledge.

Considering how fundamentally different they are from public market investments, alts like private credit can feel foreign to investors. As an advisor, you have an opportunity to separate the noise and misunderstandings about private credit from the reality of the role it can play in clients’ portfolios.

'Isn’t private credit risky and volatile?'

The way private credit is structured can be confusing, leading investors to assume a lack of liquidity equates to greater volatility. 

A client’s primary frame of reference is often public markets. Public markets are priced nearly in real time and influenced by a wide range of factors, including geopolitical events, federal rate changes, and shifts in investor sentiment. These inputs drive daily price movements and can create the perception of constant volatility.

Private credit investments, however, are generally structured as a long-term, income-oriented allocation, with returns driven by contractual obligations (rather than market sentiment). 

If you have clients concerned about private credit volatility, there may be an opportunity here to educate and reframe how they perceive private credit altogether. Private credit can’t be evaluated the same way as public equities, and clients should know what risks impact return drivers. Reinforcing time horizon and liquidity expectations specifically may help clients better understand the difference between alts like private credit and public market equities.

'What about recent private credit headlines?'

Just as big stock market swings become newsworthy, so do some isolated incidents in private credit. The media’s coverage of large-scale private credit collapses may, understandably, have clients questioning the legitimacy of the private credit space altogether. But these individual firm failures do not signal systematic instability. 

To generalize an asset class based on isolated incidents is a short-sighted decision that could keep clients from pursuing well-suited opportunities. Rather, remind clients that troubling headlines emphasize the need for due diligence and scrutinous manager selection.

As traditional banks reduce lending exposure, private lenders are continuing to fill the gap. Avoiding the asset class altogether because of recent headlines could mean missing out on important opportunities to diversify portfolio exposure away from public markets.

'Are we overexposed?'

Misunderstanding how private credit is implemented into a portfolio could create concerns about overexposure. Clients might assume their allocation is concentrated or dependent on a small number of outcomes.

Most private credit strategies are designed to provide exposure across a range of borrowers, industries, and structures. Similar to traditional portfolio construction, diversification remains a foundational principle.

Reemphasize with your clients the importance of diversification, highlighting how exposure is typically spread across multiple investments rather than concentrated in a single position. Private credit should be evaluated relative to a client’s overall asset mix, liquidity needs, risk tolerance, and time horizon.

'How do we know the manager is reputable?'

Manager selection is one of the most important drivers of outcomes in private credit. Clients often focus on yield comparisons, but managers should be evaluated based on their track record across market cycles. This can offer better insight into their underwriting practices and the quality of their borrowers. 

Given the complexity of private credit, partnerships with experienced direct lenders are particularly important. A disciplined, repeatable investment process is often a stronger indicator of quality than headline returns.

'What about fees?'

Fee sensitivity is a legitimate concern for investors and should be addressed directly. Private credit strategies often carry higher fees than traditional fixed income. As an advisor, you may need to remind clients that, despite higher fees, private credit strategies can still deliver value through enhanced yield and noncorrelated return drivers.

Confirm that any potential private credit opportunity your client considers aligns with their broader financial plan. Take into consideration each client’s unique liquidity needs, income objectives, time horizon, and long-term goals. Private credit allocations are meant to complement (not replace) exposure to traditional public markets within a diversified portfolio.

Where private credit fits in a conservative portfolio

A diversified private credit portfolio offers high-net-worth investors exposure to lending across different sectors. The opportunity to diversify away from public markets may be appealing, particularly for those with the ability to lock up liquidity in exchange for greater income generation and potential portfolio resilience.

Rather than relying on large macroeconomic bets, private credit’s diverse exposure can help stabilize returns and reduce reliance on more volatile public market assets.

If your client has questions about private credit, take time to understand the root of their concerns. Are they focusing too closely on recent headlines? Is there a misunderstanding about the fundamentals of private credit? Often, clients’ concerns stem from not knowing how private credit works or the role it could play within their portfolios. At the end of the day, private credit is quite similar to every fixed invest income investment, just in a different structure. Money is lent to a borrower, interest is charged and repayment of principal is contractually obligated.

As an advisor, you may be able to use client questions as a chance to reinforce the importance of strategy, discipline, and long-term planning.
 

Andrew Kelsen is the chief investment officer at Moneta.