Insights Investment Research

4 benefits of investing in private credit

Recent innovative fund structures and technology developments have helped expand the availability of private market investment solutions.

Sri Menon Apr. 10, 2024 3-minute read

Private credit is an alternative investment offered through private markets. It refers to loans typically originated by private lenders without the use of a financial institution. This solution offers an array of investment opportunities across corporate, real estate, structured and infrastructure debt.

The current macroeconomic environment is one of low real growth, high inflation and elevated interest rates Opens in a new window.. In this environment, it’s anticipated that private market investment solutions could potentially outperform their public market counterparts. This is because private credit can potentially benefit from its floating rate structures, as well as a more stable valuation approach.

Although access to private markets for individual investors has been historically limited, recent innovative fund structures and technology developments have helped expand the availability of private market investment solutions to a broader range of individual investors.

Previously, accessing private credit was typically offered through a single private credit fund. Now, the landscape is more accessible and sophisticated with several investment options available including evergreen funds and business development companies (BDCs), as well as levered and unlevered funds.

Here are 4 benefits of investing in private credit markets.

1. Well-balanced diversification

Private credit can be part of a well-balanced diversification strategy that includes different sectors, geographies, currencies and asset classes. This helps mitigate risk throughout all parts of economic cycles. A diversification mix that includes both cyclical and counter-cyclical strategies allows for better positioning across various market conditions. It also helps enhance the potential for capitalizing on diverse investment opportunities.

2. Superior income generation

Although past performance isn’t an indication of future earning potential, when investing in private credit it’s a good idea to seek investment options that have a proven track record of generating higher yields compared to traditional asset classes. Superior income generation often results from the ability to offer tailored financing solutions that command a premium for their execution certainty, flexibility and customization.

3. Potential for greater returns

Private credit has the potential to outperform its public market equivalents. In a high interest rate environment, floating rate investment options such as private credit can offer a hedge against interest rate risk — making them a strategic choice for potential greater returns. Private credit offers premium spreads to their public market counterparts in exchange for lower liquidity. Learn more about floating rate investment options (PDF, 490 KB) Opens in a new window..

4. Possible lower volatility

Private credit investments exhibit lower volatility compared to public equities and debt securities. Since these investments are not traded on public exchanges, their valuations are not as susceptible to daily market fluctuations. This can provide a stabilizing effect on a portfolio, offering smoother return profiles over time.

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Written by

Srikant Menon

Director, Alternative Investment Research, CIBC Asset Management

4 benefits of investing in private credit

1. Well-balanced diversification

2. Superior income generation

3. Potential for greater returns

4. Possible lower volatility

Looking for guidance with your investments? We can help.

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