Matt Bass
Private credit’s been on quite a journey over the past 15 to 20 years. If I look back around on the GFC, it was really a niche asset class. You fast forward to today, it has gone from a niche allocation in investor portfolios to a core part of their portfolio.
Private credit is a lot more than just corporate direct lending. The market’s also expanded beyond corporate credit into asset-based finance. Think of it as lending to non-corporate borrowers. So that could range from financing residential mortgages. It can include consumer credit, it can include things like commercial real estate lending.
A lot of what we’re talking about was typically handled by banks. And over time, a lot of the activity has moved outside the banks. It’s moved into the public capital markets. It’s now increasingly moved into private capital markets.
Regulation was a driver of that, of course, but it was more than regulation. It was the role that private capital has played and continues to play from a borrower perspective in terms of flexibility, speed and certainty of execution.
In speaking with investors, the question comes up: why should I allocate to private credit? What will it do for me? I think about that in terms of three main buckets.
One is illiquidity premium. Relative to comparable public assets, private credit is illiquid. That’s a feature, not a flaw, that allows managers the time and flexibility to structure custom bespoke transactions to meet borrower needs. If you’re able to lock up capital, it’s going to be a certain percentage of your portfolio that you’re comfortable with. From a strategic asset allocation perspective, you could benefit from that illiquidity premium.
Two would be diversification. Companies are increasingly looking to tap private markets for financing needs. So if you want full exposure, diversified exposure, to corporate credit, private credit needs to be a part of that or else you’re missing out.
And the third would be private credit has attributes, document structure, covenants [and] smaller lender groups that, if executed correctly, are an excellent risk-mitigation tool as well.
Going forward, we expect more dispersion in performance. Fundamentals are normalizing, liquidity is normalizing. I think that’s going to lead to more dispersion between managers. Ultimately, to do well in this business, experience really matters. Pattern recognition matters. Being able to learn from your mistakes—and you always make mistakes—that really matters as well. And it’s gotten us to a point now where private credit is really a third pillar in financing companies and assets alongside banks and public capital markets. And all three coexist. It’s not a matter of one versus the other. They all serve an important role in financing the economy.