Demystifying Private Credit

What You Need to Know

A new wave of opportunity seems set to flow into private credit markets, which could enhance risk-adjusted returns and diversify portfolios. What’s driving this potential, and how should investors think about integrating private credit into their existing portfolios? We think it’s sensible to follow a set of concrete steps along the path from consideration to implementation.

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Many descriptions of the opportunity in private credit start with the premise that the traditional 60/40 stock/bond strategy, an investing staple for decades, is—to put it bluntly—dead. To paraphrase Mark Twain, we think its death has been greatly exaggerated.

Sure, traditional investing does face challenges from higher structural inflation, lower economic-growth expectations and long-term demographic trends. Given these headwinds, and where rates and valuations stand, the 60/40 is likely to deliver more modest returns than usual. It still has something left in the tank, though, and we believe it’s a sound starting point for portfolio construction.

However, we also think that a critical piece is either missing or underrepresented in many portfolios today. It’s one that has the potential to enhance income, diversification and risk-adjusted returns—the private-credit dimension. Historically, private credit has handily outperformed public credit over the past two decades (Display 1), while also defending much better during bear markets.

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