As stock and bond market performance over the last few years has become increasingly correlated, investors are searching for more diversified investments. Alternative investments are often broached as an option, since they offer the potential for enhanced return and are generally less correlated to traditional assets.
Yet alternative assets are not one thing – the category includes diverse sub-asset classes such as private equity, private credit, real estate, venture capital, hedge funds, cryptocurrencies, and collectables such as art, fine wine, vintage cars, etc. For investors, it’s essential to dissect the value propositions of different asset and sub-asset classes to choose the investments that are right for their portfolio objectives and risk tolerance.
This article focuses on the attributes and performance of shorter-dated private credit assets, like those offered on Percent. On average, these private credit deals offer yields that exceed treasury benchmark rates, recurring income distributions, and shorter-dated investment timeframes.
Private credit and traditional asset classes
The poor performance of traditional asset classes in 2022 caused investment professionals and portfolio managers to debate whether public market investments should skew more towards bonds and if investors should increase alternative investment allocations to 10% or more of their total portfolio, given that traditional asset classes of stocks and bonds were positively correlated and had weak returns in a volatile market.
Thus, it’s worth looking at private credit deals in light of public bonds, which actually represent a broad array of assets. They could be U.S. Treasuries and other non-U.S. government bonds, corporate investment grade bonds, high-yield corporate bonds, and / or even ETFs comprised of assets like leveraged loans, in which the underlying collateral is arguably illiquid and can be difficult to price. For each of these types of securities, the underlying credit risk, maturity, collateral, covenant protection, secondary market liquidity, etc., varies significantly. However, all these instruments offer fixed interest payments with principal repaid at maturity.
Private credit assets share some of these attributes, with contractual returns, a stated maturity, security/collateral, and covenants, and a credit risk profile not dissimilar to that of leveraged loans or more speculative corporate bonds. A J.P. Morgan report notes that “Investors navigating the universe of publicly traded bonds must often accept lower credit quality if they seek higher return potential. For those investors, private credit may be worth a look. Private credit historically has offered premium yields and returns with greater structural protections relative to other fixed income opportunities.”1
Private credit and other alternative assets
It can be challenging to compare private credit to other alternative investments, since the attributes are starkly different from each other given the wide variety of underlying assets. Yet there are some points of clear differentiation.
- Cryptocurrencies, art, precious metals, wine, and other collectables do not offer contractual returns, and most have no fundamental basis for being valued aside from the price agreed by a buyer and seller.
In contrast, private credit assets can be valued on a fundamental basis and generally offer a contractual return.
- Many alternatives have long-term investment horizons – lifetimes or generations in some cases. Some alternatives may be seen to have a greater potential upside; however, the investment horizon can be a factor as to whether that upside can be realized. Liquidity and returns often depend on the particular economic/market conditions at a specific moment in time.
Private credit assets can have short maturities (including most of the deals offered through the Percent platform). This allows investors to access their capital within a shorter time frame, keeping funds available for reinvestment as market conditions change. When a private credit investment matures or is called prior to maturity, the investor can choose to redeploy their capital into another private credit opportunity or withdraw the funds completely.
Invest like big institutions
In short, private credit differs from many alternative assets in offering yield and security for those interested in current income and wealth preservation, without a long-term lock up of capital.
They are following a well-trod path: According to Pensions & Investments annual survey of the top 200 retirement plans, private credit assets grew 12.5% to $98 billion in the year ended Sept. 30 [2022].”2 Institutional investors understand the value that private credit can add to a portfolio. Now retail accredited investors can access that same potential with Percent. Our unique marketplace makes it easier to discover private credit deals and simplifies the investing process, helping investors diversify their portfolio and create the potential for higher returns.
1https://privatebank.jpmorgan.com/gl/en/insights/investing/case-for-alternative-investments
2https://www.pionline.com/alternatives/institutions-boost-exposure-private-credit-despite-risks