ETFs
The Virtus Private Strategy Credit ETF (VPC) is the only exchange-traded fund dedicated solely to tracking private credit. There are other ETFs with a portion of their portfolio held in private equity. The fund carries an expense ratio of 9.72% and has a 12-month yield of 10.52%, according to Morningstar. The fund’s five-year annualized trailing return as of Oct. 29 was 7.95%.
The ETF tracks the Indxx Private Credit Index, which provides passive exposure to private credit instruments that are exchange listed.
Investing Platforms
Several investing platforms, such as Yieldstreet, offer access to both accredited and non-accredited investors to a number of alternative portfolios such as art, collectibles and private credit.
For non-accredited investors at Yieldstreet, the minimum investment is generally $10,000. Accredited investors can typically open an account and invest in one or more of their funds. There is a lockup period on the investment during which the investor cannot access their investment.
Benefits of Private Credit
Private credit can be a valid alternative investment strategy for a portion of clients’ portfolios. Here are some positive features:
- Low correlation and diversification: Private credit as an asset class has a generally low correlation to traditional assets like stocks and bonds. As an alternative asset class, private credit can offer an additional level of portfolio diversification that clients can’t get through allocations to stocks and bonds.
- Potentially higher yields: Private credit funds and instruments often have a higher yield than many traditional fixed income vehicles. Some of the borrowers, often small to mid-sized businesses lacking a solid business credit history. may not qualify for more traditional banks loans and other traditional sources of business credit. These higher yields can be attractive for some clients.
- Lower volatility: Private credit funds and investments often have a lower volatility level than other high-yield debt instruments. This lower volatility can provide a level of downside protection for investors.
- Access: Private credit funds offer investors expanded access to an asset class that was previously accessible only to institutional investors like pension funds and endowments.
Downsides of Private Credit
A few potential downsides of private credit include:
- High costs: Most funds and investment vehicles offering private credit access to retail investors come with high costs relative to many other investment vehicles available to them.
- Illiquidity: Funds that invest in private credit do not offer the daily liquidity that comes with a regular 40 Act mutual fund. Investors need to be able to have the money invested in the fund tied up for a period of time. This should be part of the calculation of how much to invest here.
- A down market or economy: As the growth of accessible private equity investments is relatively new, there are concerns as to how these funds will perform in the next economic or market downturn. The level of risk is unknown to a point.
An Expert’s Viewpoint
F. Mackey Schneider, co-founder and private wealth advisor at Haven Wealth Advisors, Northwestern Mutual Private Client Group, detailed a few cautions that both advisors and individual investors should keep in mind when contemplating an investment in private credit.
In general, he says, he is in favor of the “democratization” of investing.
“That is, letting the ‘little guy’ gain access to products, structures and services that were heretofore reserved for only institutions or the very wealthy,” Schneider said. “In addition, it appears that historically, for some, portfolios that added alternative investments, such as private equity, private credit and private real estate, may have had higher returns with less volatility.”
He noted concerns around whether retail consumers actually understand the products and the risks associated with them.
“They see the higher returns and hear statements like, ‘They haven’t had a negative month in 10 years,’ and they think that going forward they will get the same results,” Schneider said. “That is always implicit in the pitch. But will they? Will return patterns be the same going forward from these elevated levels?”
The nature of the debt, he added, brings attendant liquidity risk, even with the availability of quarterly redemptions.
“That works, assuming there is nothing bad happening at the time you need to exit,” Schneider said. “However, what happens if and when everyone hits the exit at the same time? Private credit is very illiquid, especially during a liquidity squeeze, which is probably the only time people will want to exit. They don’t want to exit when everything is going well.”
