How to find the private credit investment solution that’s right for you

Over the past couple of years, it’s become easier to find good institutional quality managers with products aimed at individual investors. This type of access was historically only available to the largest and most sophisticated institutional investors, such as pension plans and foundations.

Private credit isn’t a new buzzword in the retail market, but much of what was previously available can be thought of as version 1.0. The breadth of opportunity was narrow and the quality of collateral less than ideal. In other words, the manager universe wasn’t necessarily one that large and discriminating institutions would select from.

Individual investors now have the ability to access institutional quality managers and invest in direct lending on far friendlier terms than institutional investors are used to — no capital calls, much lower account minimums, and slightly more liquidity.

Private credit’s purpose for investors is to create a reliable stream of high income around a diversified set of businesses. This is arguably useful for most investors, especially now that the borrower base is not available in the public markets most people invest in.

However, because the underlying assets are not liquid, investors should be committed for the long term even if the product offers liquidity features, such as quarterly redemption. These liquidity features are meant to allow for coincidental and unexpected cash needs, such as an illness. Expecting to use the available liquidity to make a wholesale change based on a tactical shift, for example, would be challenging for the fund to honour if everyone has the same idea. There simply wouldn’t be enough liquidity for all investors to do so at the same time. This could result in a fund enacting limits on redemptions, which can create confusion and discomfort for investors. This could happen regardless of how stable the underlying investments might be.

“An investor with an institutional type of temperament that understands how the illiquidity premium is meant to be earned — working with an investment advisor or counsellor with an investment policy statement keeping them on track — would be a really good fit for private credit,” says Mr. Wong.

The right way to use private credit is by finding a vehicle that makes sense for your portfolio needs.

“Find a manager that has advantages that are unique and critical to private credit — the operational know-how, the history and relationships with sponsors and borrowers to get access to loans on favourable terms,” advises Mr. Wong.

“A manager with breadth and depth of team to go deep into the financial statements of prospective borrowers, and a track record that can be analyzed for how the manager navigated through the tougher credit environments are critical considerations.”

To learn more about the potential role private credit solutions can play in your portfolio, contact your advisor or CIBC representative.