The growth in private credit investments

| February 09, 2024

In the past I’ve mentioned that adverse conditions in one area of the market can create opportunities elsewhere. For example, the increased interest rates we’ve suffered has hurt in lots of ways, but this environment has helped providers of private credit.

You’ve probably heard of private equity but might not be as familiar with private credit. I’m not referring to loans from large, scary men you pay back in dingy bars with cash-stuffed envelopes. Private credit includes loans to businesses by entities such as institutional investors rather than banks.

Demand for private credit has grown significantly in recent years. This market increased to $1.4 trillion in 2023 from $875 billion in 2020. Estimates are that the private credit market will reach $2.3 trillion by 2027. One reason for the increased demand is that banks currently are in retreat mode because of liquidity constraints, increased regulatory scrutiny, and their higher borrowing costs. So these private institutions are filling a void.

Retail investors can get into the action, too. They’ve been piling into private credit opportunities because they offer good return potential compared with fixed-income investments. For example, in 2022, when stocks and bonds both were well under water, private debt funds returned 4.2%.

This is an example of an investment that’s typically open to clients meeting certain financial requirements. The Blackstock Private Credit Fund (BCRED), for example, requires investors to have a net worth of $250,000 or a gross income of $70,000 and a net worth of $70,000. It may sound a bit unfair that some people have access to investment opportunities others don’t, but as the saying goes, there’s no such thing as a free lunch.

A big reason for the exclusivity is that these investments aren’t as liquid as, say, stocks. For example, BCRED isn’t traded on the open market and allows you to redeem shares only quarterly. BCRED limits quarterly repurchases to 5% of the shares outstanding, and the board can suspend share repurchases. So if the fund tanks, you’ll have to wait to redeem shares, and there’s no guarantee you’ll be able to redeem all the shares you hold.

There’s also the risk that exists for the general credit market. As we saw with regional bank, high interest rates can take their toll on a business. The high interest rates companies are paying on loans can affect their cash flow, which might make it harder to pay back the loans.

I’m also wary of “hot” products. I’m concerned that as more and more people want to tap into private credit funds, fund providers will try to strike while the iron is hot by developing increasingly exotic, less transparent products that are harder to understand, more expensive to own, and riskier to hold.

You can get a lot accomplished with stocks, bonds, and other investment vehicles. But for certain investors, private credit funds are a way to make the high-interest-rate environment work for them by adding diversity to their portfolio.

Sources
https://www.morganstanley.com/ideas/private-credit-outlook-considerations

https://www.bairdwealth.com/globalassets/pdfs/help/private-credit-funds-disclosure.pdf

https://www.bcred.com/investor-services-faqs/

https://www.barrons.com/articles/private-credit-funds-alternative-assets-carry-risks-12ab8a09



Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com.   Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.  An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.  CDs are FDIC insured and offer a fixed rate of return.  They do not necessarily protect against a rising cost of living.  The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value.  Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.