What You Need to Know
The private credit industry has been under intense focus in the early months of this year, with questions being raised about its role in portfolios. The Achilles heel of the industry has always been the charge that it is untested, at least in its present form, in a default cycle. Do recent developments mark such a fear coming to fruition?
In this note, we take a strategic cross-asset view of the role of private credit in portfolios. There has undoubtedly been a deterioration in sentiment toward the asset class. However, so far at least, this appears to reflect a mismatch between investor expectations around liquidity and the underlying reality of the asset class rather than a credit event per se.
From a cross-asset perspective, we need to compare private credit to opportunities that are lackluster elsewhere: the lack of an illiquidity premium in private equity; expensive and concentrated public equities; tight spreads in public credit; and inflation risk for long-duration bonds. Hence, we maintain a strategic low-return view (although not a bearish one).
There are genuine open questions about how private credit could behave from here. It is less attractive than it was two years ago on an absolute basis and defaults will likely rise, reinforcing the view that outcomes will depend increasingly on underwriting discipline, structuring and manager selection rather than a blanket return for the asset class.
However, it still has an illiquidity premium that, crucially, one can observe ex ante. For institutional investors trying to achieve real returns and incorporate sources of diversification, we think that private credit still plays an important role.
This note reviews the overall strategic case for private assets and outlines our framework for incorporating both public and private assets in portfolios.
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