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Unlocking Opportunities with Private Credit Investments

May 20, 2024
by  Derek Oglesby
  read time: 1:45

Most traditional investment portfolios utilize debt instruments, such as bonds, as a core component of their asset allocation. The reason for this is that bonds can offer predictable income streams, preserve capital, and provide diversification away from stocks and equities. However, the evolving financial landscape has continued to open new opportunities, particularly in private credit, which can offer even great benefits. 

Public vs Private Credit Markets

“Public credit” markets involve loans and bonds issued by corporations or government entities that are traded on public exchanges. The advantage is that these instruments are typically highly liquid, but their returns historically have been modest, often aligning closely with the performance of broader markets and heavily influenced by both interest rate changes and economic cycles.

Private Credit Markets

In contrast, “private credit” refers to loans provided directly to companies by non-bank lenders, such as private credit funds, which are not traded on public exchanges. This makes private credit less liquid but allows for several unique advantages:

  • Higher Returns – Private credit has historically provided average annual returns of 9% over the past decade, more than double the returns from public loans and even outperforming global equity markets.[1]
  • Risk Mitigation – Many private credit investments involve what are called “senior loans” that sit at the top of the capital structure.  This means that if the borrower becomes distressed, these loans are repaid before equity and junior debt, thereby reducing potential losses.
  • Customizable Terms – Private lenders are often able to negotiate more favorable terms, including covenants that provide protections for the lender and allow them to manage risk more effectively.
     
Potential Benefits of Adding Private Credit to Your Portfolio

So, what impact should an investor expect from adding private credit to their overall portfolio?

  1. Interest Rate and Inflation Hedge – Private credit often includes floating rate loans, which adjust along with moving interest rates, helping to mitigate the risks associated with rate hikes and inflation.
  2. Income Generation – These investments frequently offer higher income levels compared to other asset classes, which can provide a valuable income stream during economic downturns.
  3. Portfolio Stability – The standard deviation of private credit returns over the last 20 years is under 4, compared to 16 for U.S. equities.[2] This can help mitigate the swings associated with the equity market and, to some degree, the public credit market.
  4. Enhanced Performance – This is the bottom line for many investors.  Incorporating private credit into a traditional 60/40 portfolio has been shown historically to increase returns while decreasing overall risk.[3]
     
Why Choose Provista Wealth Advisors

At Provista, we are dedicated to helping our clients navigate the complexities of private credit investments.  Our expertise allows us to tailor investment strategies that align with your financial goals and risk tolerance.  We believe in the potential of private credit to enhance a portfolio, providing both stability and the chance for superior returns.

 

Take the Next Step

Contact us today to discuss how private credit may fit into your investment strategy.  We would love the opportunity to assist in determining the most appropriate strategies for you.

 
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