Private Credit: Is the Juice Worth the Squeeze?
In this publication, Nora Pickens, Partner, Investment Strategy, analyzes the risk and return profile of private credit versus public fixed income markets. While private credit offers higher potential returns due to its illiquidity and long-term holding strategy, it demands careful risk management. The starting yield is the primary factor driving returns. Historical data indicates that lower-rated debt (B and CCC) often fails to justify its higher risk, leading to significant losses during economic downturns.
- Private Credit vs. Public Debt: Private credit has grown significantly since 2008, filling a gap left by traditional banks. However, its shorter track record
limits understanding of long-term risks. - Yield and Risk: Private credit may underperform during early stages of downturns, but its higher yields can lead to quicker recovery and better long term returns when properly priced.
- Manager Selection: We believe success in private credit depends on choosing managers with strong underwriting and risk management skills.
Diversification: In our view, effective diversification across sectors, geographies, and strategies is crucial to mitigate risks, especially during concentrated default cycles. - Conservative Yield Targeting: We believe investors should avoid stretching for higher yields to protect capital and achieve steady, long-term returns.
- Market Vigilance: In our view, it is important to monitor capital flows and reassess assumptions when risk premiums compress to maintain a strong
investment strategy.
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Any views expressed above represent the opinions of Mill Creek Capital Advisers ("MCCA") and are not intended as a forecast or guarantee of future results. This information is for educational purposes only. It is not intended to provide, and should not be relied upon for, particular investment advice. This publication has been prepared by MCCA. The publication is provided for information purposes only. The information contained in this publication has been obtained from sources that
MCCA believes to be reliable, but MCCA does not represent or warrant that it is accurate or complete. The views in this publication are those of MCCA and are subject to change, and MCCA has no obligation to update its opinions or the information in this publication. While MCCA has obtained information believed to be reliable, MCCA, nor any of their respective officers, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
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