Adding Private Credit To A Client’s Portfolio

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The term “going private” used to describe an enterprise’s effort to reduce the number of its stockholders in order to terminate its public company status. More recently, the term has also become a label for investors’ attempts to boost the yield in their fixed income allocations by tapping into private credit markets.

Private credit is offered to companies primarily from non-bank entities. As the name implies, it’s debt that’s not traded publicly. Also known as "direct lending," it’s a subset of the "alternative credit" universe and is one of the fastest-growing asset classes among institutional investors. It’s no wonder why. According to the Institute for Private Capital, these assets have historically been averaging an internal rate of return (IRR) of 8.1% across all strategies, with some schemes yielding an IRR as high as 14% over the past two decades. 

Non-institutional investors are generally excluded from private markets, but nowadays high net worth individuals, family offices, and trusts are tapping into these high-yielding assets through funds offered by managers such as New York-based iCapital Network.

A suite of iCapital strategies, for instance, are included in the recently launched AssetMark Institutional investment platform, including the Owl Rock Opportunistic Fund, a limited partnership dedicated to direct lending.

The vast majority of capital in the alternative credit universe funds direct lending. Partners in the Owl Rock portfolio, for example, provide a diverse mix of credits including secured and unsecured debt, mezzanine financings, and other subordinated obligations senior to common equity.

Such senior loans generate most of their returns from coupons composed of a fixed credit spread above a reference rate such as Libor.

“We can’t speak about specific funds,” says Kunal Shah, managing director and head of private equity solutions at iCapital, “but generally speaking, corporate middle-market loan yields range from Libor (or Libor replacement when Libor is phased out) plus 500 to 900 basis points, depending on the size of the company.”

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Disclosure: Brad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) option ...

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