When comparing returns against the Cliffwater Direct Lending Index , we will take a look at my choice for investing in private credit , the Cliffwater Corporate Lending Fund ( whose ticker is “ CCLFX .”) This interval fund offers daily pricing and quarterly liquidity at a minimum of 5 % per quarter . One of the reasons I chose this fund is its broad diversification : It has almost $ 22 billion in assets across 12 industries and includes more than 20 private lenders with more than 3,700 underlying credits . Its average loan size is only about $ 5 million , a small fraction of the total underlying loans .
The fund also enjoys good credit quality ( its investments are almost exclusively in senior secured loans to companies backed by private equity sponsors ; about 95 % have first-lien exposure ). The fund further sports an attractive cost ; its management fee with other expenses ( excluding the interest on borrowed funds ) is 1.58 % ( with no incentive fee ). The average for this category was 4.12 % ( according to the 2024 edition of Cliffwater ’ s annual fee survey of 66 of the largest middle-market direct lenders , those managing $ 1.1 trillion in direct lending assets ). The 4.12 % figure includes the average of the total fees and administrative expenses for the private debt funds .
In addition , the Cliffwater fund ’ s fee is charged only on net , not gross , assets .
Private Debt Markets Have Grown Rapidly In Size
Private debt assets under management in U . S . $ Billions , as of June 30 , 2023 .
1,600 1,400 1,200 1,000 800 600 400 200
0
Source : Pitchbook
■ Dry Powder ■ Remaining Value
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Public Versus Private Credit Performance
June 30 , 2013 to June 30 , 2024 .
Annualized Return *
Annualized Risk *
Return / Risk
Private Credit |
|
|
|
Cliffwater Direct Lending Index |
9.17 % |
2.78 % |
3.29 |
Cliffwater Direct Lending Index ( net of fees ) 7.23 % 2.80 % 2.58
Public Credit |
|
|
|
Invesco Senior Loan ETF 1 |
3.31 % |
4.90 % |
0.67 |
SPDR Blackstone Senior Loan ETF 2 3.49 % 5.63 % 0.62
The average after-fee composite separate account |
|
|
|
performance of 30 large bank loan managers 3 |
4.17 % |
3.35 % |
1.24 |
Morningstar LSTA U . S . Leveraged Loan index 4 4.69 % 6.16 % 0.76
Morningstar LSTA U . S . Leveraged Loan 100 index 5 4.29 % 5.48 % 0.78 Bloomberg U . S . Treasury Bills 1-3 Month Index 1.36 % 0.88 % 1.54
* Includes the approximate start date for the SPDR Blackstone Senior Loan ETF . Footnotes : 1 . A passive portfolio tracking the performance of the Morningstar LSTA US Leveraged Loan 100 index ; it has $ 7 billion in assets , a 0.67 % expense ratio and 162 holdings . Its inception was March 3 , 2011 . 2 . An actively managed bank loan portfolio with $ 6 billion in assets , a 0.70 % expense ratio and 528 holdings . Its inception date was April 3 , 2013 . 3 . As reported to eVestment . 4 . The $ 1.4 trillion cap-weighted index of 1,372 bank loans . 5 . The $ 330 billion cap-weighted index of the 100 largest bank loans .
Considering the leverage , the effective fee on gross assets is about 1.25 %. From its inception in June 2019 through August 2024 , the fund returned 9.58 %, outperforming the Morningstar LSTA U . S . Leveraged Loan Index ’ s return of 5.58 %. For most investors that is a more than sufficient premium for accepting some degree of illiquidity . The fund also outperformed Treasury bills by 7.3 percentage points over the same period . That is about the same premium as equities have historically provided ( though with only a small fraction of their volatility ).
Cliffwater lists the largest funds in this space as the Blackstone Private Credit fund ( BCRED ); the Blue Owl Credit Income fund ( OCIC ); the HPS Corporate Lending fund ( HLEND ); and the Apollo Debt Solutions fund ( ACRED ).
Given the credit risk involved , investors looking through private credit interval funds should perform strong due diligence on each manager ’ s historical credit record to ensure that the focus is on quality and not achieving the highest returns .
The Price Of Everything
Given the choice of private and public credit , the data strongly suggest that investors should assign most , if not all , their credit allocation to private solutions . My own credit exposure is all private and includes the Cliffwater Enhanced Lending Fund ( CELFX ). From inception in July 2021 through August 2024 , this fund returned 13.17 %, outperforming the 6.25 % return of the Morningstar LSTA U . S . Leveraged Loan Index by 6.92 percentage points , while outperforming the 3.25 % return of Treasury bills by 9.92 percentage points .
It is my experience that more investors don ’ t allocate to this space because they ’ re focused on the expense ratios and want to buy something cheaper . But keep in mind the old expression about knowing the price of everything and the value of nothing . That could well apply to focusing on an expense ratio instead of the value you get for your investment .
LARRY SWEDROE is the author or co-author of 18 books on investing , including his latest , Enrich Your Future : The Keys to Successful Investing .
NOVEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 37