We're seeing the downside of private credit

If you’re somewhat tuned in to the investing world then over the past two years you’ve no doubt heard about private credit.

This has been a recent buzzword in our world. There seemed to be no shortage of articles touting how the diversification and uncorrelated returns to the stock market should be offered to more investors, and allowed as an investment option in 401ks.

Often times I read articles mentioning that one could higher yields in private credit, offered from companies that can’t get traditional financing. These articles seemingly ignored the other side of higher yields = higher risk.

Private credit/equity investments also have mystique because they are only available to ‘accredited investors’, or investors that hit an income or net worth threshold, and have a certain level of investment understanding or sophistication. The world of finance has found a way around this and started to offer these private credit/equity strategies getting to retail investors.

Well it seems that right now we're seeing the tide go out on a lot of these private credit funds and companies, and we're feeling the risk and downside.

The WSJ wrote up a good piece about this - it’s behind a paywall - so I’ll give a summary here.

Inside a $42 Billion Private-Credit Black Box: More Black Boxes

Some of the biggest private credit funds and companies in the space are getting too many cash redemption calls and the funds can’t fulfill all of these requests. The most notable example the CliffWater fund. Investors asked for 14% of their money. Only 7% is being paid out.

This means that some investors asking for their money won’t get it, at least not right now.

There are also redemption requests being denied from other funds at BlackStone, BlackRock, and Morgan Stanley.

In most of the commentary I’ve read on private credit/equity in recent years, liquidity risk seemed to be conveniently forgotten about. Now we’re feeling the pain of this.

Liquidity is often a forgotten consideration with traditional stock and bond fund or ETF buyers because they can sell their shares on the exchange and get cash very quickly.

But recent headlines remind us why liquidity is such an important consideration when we invest.

This is one of the key areas in which we help clients when we build their financial plans;

If you need quick access to funds - what is our backup plan if we can't access this cash?

In our plans we try to determine how much control over the timeline of the purchase we have. If there isn't a lot of flexibility or control, then we need to think twice about investing in these asset classes, and how much of your portfolio you can afford to potentially be locked up in one of these funds.