Separating Noise from Fundamentals

Private Credit Reality Check: Separating Noise from Fundamentals
What I'm hearing the most from all of the clients that I'm talking to is that investor sentiment is real. And they're hearing it from their investors, and their retail investors specifically, that they're concerned about the overall asset class of private credit.

[0:26] Addressing Sentiment: The Private Credit Landscape

This is not a new asset class. Institutional investors have been investing in this for years. Private credit has been around for years, and so people understand how to invest in this space. But the idea that this is meant to be a long-term hold needs to be educated. And it's meant to be a part of the portfolio where you just kind of set it and you forget it. And it's meant to be income-producing, and also an inflation hedge that's there.

And I think overall, what we need to bring all investors back to is the strength of this asset class – of being senior secured debt. And as a result of it being the first that is repaid in any type of situation, that the overall credit losses in this overall asset class has been 1% over the entire history. So, a very, very low loss rate over time.

[1:28] Public vs. Private: Different Markets, Different Roles

I'm hearing from all of my discussions is really the need to emphasize the difference between public and private. We all talk about the convergence of public and private, and that's because each brings a different aspect to the portfolio. And we need to ensure that investors understand the difference—that they're not to be treated the same. And that this is traded, this is not traded. There's a reason for that. There's a different type of underwriting process for both sides. Both are good, both are different.

On the public side, someone can take a position on a company, on a specific asset class, on an industry. They can make the investment in that, and then they can change their mind. And if they change their mind, they can trade out of that. It's liquid, and that's what it's meant to be. So, that's one part of a portfolio.

On the private side, that is not the case. It's not meant to be traded. And you're getting paid a premium for that, right? An illiquidity premium to be on the private side. So, what does that mean? And I think we need to do a better job explaining to investors why can you get comfortable with that? And I think it comes down to the underwriting process.

[2:45] Disciplined Underwriting: Identifying Quality, Avoiding Compromise

And in our underwriting process, because we can't trade out of it, our diligence on every single company and investment that we make within our platform is very, very deep. So, it's not done in a week, right? It takes a month, two months for us to fully vet any investment.

And in doing that, we're looking at the company, we're looking at the company's historical performance, we're looking at the industry, analyzing how this company fits within the industry—does it have a reason to exist? Then we're projecting the future. How is this company going to perform if its earnings decline? Will they still be able to service the debt load that we're putting on them?

And in order to get all of that analysis down, it's put into a memo that's 40 to 60 pages, right? That is presented to the investment committee. It is only after questions are answered, and maybe some follow-up questions are answered, that we make the decision that we're going to actually invest in this. So, very, very slow, thoughtful investing parameters and a process that we undertake.