COLLEGE PLANNING | ESTATE PLANNING | INSURANCE | INVESTING | PORTFOLIO SPOTLIGHT | REAL ESTATE | RETIREMENT | TAX PLANNING
Private Credit Steals The Spotlight
This $ 15 trillion asset class is growing fast and offering higher returns and less risk than private equity .
By Jennifer Lea Reed
PRIVATE EQUITY AND DEBT DEALS ARE attractive to wealthy clients for several reasons . For one thing , these asset classes give investors access to the deals the public markets can ’ t . Private investments also give investors a certain cachet if dinner party talk winds around to Wall Street .
And it ’ s never been easier for financial advisors to connect their clients to such investments . Thanks to regulatory changes in banking , new fund structures and advances in financial technology , deals that only institutions were privy to in the past have entered the mainstream for the very well-off .
“ I would say private credit and private equity are appropriate for almost anyone ,” says Jeff Sarti , CEO and partner at Morton Wealth in Calabasas , Calif . “ Typically , most would say these private structures are only appropriate for the ultra-high-networth or the high-net-worth investor . I disagree . I think there ’ s tremendous opportunities outside of public stocks and bonds .”
Rob Young , senior investment analyst in the Chicago offices of Telemus , cites key reasons that he , too , is excited about private equity and debt being available to a broader range of advisory clients . “ Private alternatives used to be out-of-bounds for high-net-worth individuals , largely because of the liquidity requirements ,” Young says . “ Now they ’ re becoming more semiliquid , and they ’ re registered . So they ’ re a little more open to our type of clients . And it ’ s something that appeals to our clients because it gives them access to a greater universe of companies .”
At the same time , consider what ’ s happening in the public stock market . The universe of U . S . public companies has shrunk . Data companies tracking the space say the number of companies peaked at roughly 8,000 in 1996 , only to drop to about half that , 4,100 , by 2019 . The reason ? More companies were enjoying the privacy that kept their product development and business plans shrouded in secrecy , and they found all the financial support they needed through private investors .
At the same time , since the global financial crisis of 2008- 2009 , the traditional bank lending market has dried up as banks require more stringent capital ratios to satisfy regulators , Young says . “ And they have to do that because the source of funds for that market is bank deposits . Whereas for private credit managers , their source of funds are institutional investors and highnet-worth individuals . The taxpayer is on the hook in the bank market [ but not ] in the private credit market .” Historically , private equity has attracted more investor interest than private credit . Over the last 20 years , private equity funds returned 15.25 % annually , according to Boston-based Cambridge Associates , although there is great dispersion between the worst performers and the best .
Private credit has always trailed behind , at least until the beginning of 2022 when its rate of return nudged ahead . Since then , private credit has had stronger returns in all but one quarter , says the State Street Private Equity Index , which monitors roughly 3,800 partnerships with about $ 4.6 trillion in capital commitments .
JANUARY / FEBRUARY 2024 | FINANCIAL ADVISOR MAGAZINE | 43