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5 Things to Consider When Investing in Private Credit

October 2018 - 3 min read

In this piece from Benefits and Pensions Monitor, Barings’ Ian Fowler discusses five key considerations for investors interested in allocating to private credit.

IAN FOWLER OF BARINGS DISCUSSES FIVE KEY CONSIDERATIONS FOR INVESTORS INTERESTED IN ALLOCATING TO PRIVATE CREDIT.

  1. Private credit, or direct lending to the middle market asset class, can offer investors a range of investment opportunities that can be customized to meet their risk/return objectives.

In the U.S., the middle market is a large and critical component of the economy. It represents roughly a third of U.S. GDP, employs a little over 30% of the U.S. labor force and consists of nearly 200,000 companies, providing managers with a large opportunity set to construct diversified portfolios.1

Transactions can be structured to offer a range of risk-adjusted returns and yields through allocations to different parts of the corporate capital structure. For instance, senior secured loans, which sit at the top of the capital structure, have historically delivered returns ranging from 6%–8%.2 Because these loans sit at the lower end of the risk/return spectrum, they have the potential to provide stable cash flows over time and can be useful for liability matching or yield enhancement for low beta portfolios. Mezzanine/junior capital, on the other hand, has historically looked attractive for its potential to deliver higher average returns—typically from 10%–15%²—with lower volatility than some public market asset classes.

 

  1. Source: National Center for the Middle Market. As of June 30, 2016.
  2. Source: Based on Barings’ market observation. There is no guarantee the stated returns will be achieved. As of June 30, 2018.
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