Private credit has become the darling of investors seeking superior returns, outshining traditional bonds. According to Hamilton Lane, private credit has delivered an impressive 8% annual return over the past 15 years, beating out investment-grade and high-yield bonds.
However, a recent study by the National Bureau of Economic Research suggests that the allure of private credit may be overstated. While private debt funds offer high yields to investors, the risk-adjusted returns may not necessarily outweigh the associated fees and risks. With default rates currently at 3%, the potential impact of a recession looms large.
Despite these challenges, institutional investors continue to flock to private credit funds in search of higher yields and downside protection. McKinsey & Co reports a significant increase in private debt assets under management, now totaling $1.7 trillion.
Although recent returns have dipped due to a slowdown in private equity activity, private credit has historically outperformed other alternative investments like junk bonds and leveraged loans. Its resilience during market downturns, such as in 2022 and during the 2008 financial crisis, underscores its attractiveness to investors looking for stable returns.
In a landscape where traditional fixed income assets are losing favor, private credit remains a viable option for investors seeking higher yields and portfolio diversification. While the risks are real, the potential rewards of private credit cannot be easily dismissed.
