Image by Oleksandr Pidvalnyi from Pixabay
I’ve been quite critical of private investments. They’ve grown tremendously over the past decade. Drawn to their seemingly high returns and low volatilities, investors have poured billions into them, reallocating funds from traditional public stocks and bonds. While the Federal Reserve’s (Fed) aggressive policy hikes slowed inflows for some alternative investments, private credit’s continued to climb. Investors clamor for more. Despite my belief that many alternative investment benefits are misunderstood, private credit, in my view, has its virtues; just not what’s commonly discussed.
Investments in alternatives have grown significantly over the past decade. Source: Bain Private Equity Outlook in 2023
Private credit is a subset of the alternative investment universe. Yield-starved investors surged into this market in search of higher returns. Some estimate its market size to have reached $1.5 to $2.1 trillion, globally, placing it on par with the public leveraged loan market. Such growth has understandably raised fears of systemic risk. However, I find them misplaced. Private credit stabilizes the financial system.
New look, same great taste
To assess the potential risks private credit pose, it’s important to first understand it. Private credit encompasses a broad range of debt investments, including direct lending, mezzanine loans, venture debt, bridge loans, distressed debt, and even structured products. Private credit typically lends money to borrowers unable to access more traditional pools of capital like banks and the public bond market, though the defining lines have increasingly blurred.
While fashionable of late, private credit is not new. (All) private investing predates public markets by millennia. Markets and exchanges where assets could be openly bought and sold among strangers weren’t invented until the 12th or 13th century. Before then, investing was reserved for the wealthy who invested directly with those seeking capital. To be sure, the