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.
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.
What’s behind private credit’s strong showing? The answer is twofold. First, private market assets offer premiums to compensate investors for less liquidity—they may not be able to sell the security when they want. These premiums put yields higher than those of comparable public investments. Second, private lenders can negotiate loan terms directly with borrowers, incorporating requirements that provide added protection from defaults—along with generally higher recovery rates if defaults do happen.
The Private-Credit Market Origin Story
The headlines about banks stepping back from lending are often top of mind when private credit is mentioned today. This isn’t a new process—it’s actually been in motion for decades, driven by interest-rate environments, regulation and innovation. Leveraged loans are a good example: at one time, banks accounted for 70% of the market; today that share is less than one quarter.
The value of an investment can go down as well as up, and investors may not get back the full amount they invested. Capital is at risk. Past performance does not guarantee future results.
Important Information
The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized.
The views expressed herein may change at any time after the date of this publication. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions.
References to specific securities are provided solely in the context of the analysis presented and are not to be considered recommendations by AllianceBernstein. AllianceBernstein and its affiliates may have positions in, and may effect transactions in, the markets, industry sectors and companies described herein.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Note to All Readers: The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized.
Note to Readers in Canada: This publication has been provided by AllianceBernstein Canada, Inc. or Sanford C. Bernstein & Co., LLC and is for general information purposes only. It should not be construed as advice as to the investing in or the buying or selling of securities, or as an activity in furtherance of a trade in securities. Neither AllianceBernstein Institutional Investments nor AllianceBernstein L.P. provides investment advice or deals in securities in Canada. Note to Readers in the United Kingdom: Issued by AllianceBernstein Limited, 60 London Wall, London, EC2M 5SJ, registered in England, No 2551144. AllianceBernstein Limited is authorized and regulated in the UK by the Financial Conduct Authority (FCA). Note to Readers in Europe: This information is issued by AllianceBernstein (Luxembourg) S.a r.l. Societe a responsabilite limitee, R.C.S. Luxembourg B 34 305, 2-4, rue Eugene Ruppert, L-2453 Luxembourg. Authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF). Note to Readers in Switzerland: This information is directed at Qualified Investors only. Issued by AllianceBernstein Schweiz AG, Zurich, a company registered in Switzerland under company number CHE-306 220 501. AllianceBernstein Schweiz AG is a financial service provider within the meaning of the Financial Services Act (FinSA) and is not subject to any prudential supervision in Switzerland, Further information on the company, its services and products, in accordance with Art 8 FinSA can be found on the Important Disclosures page at www.alliancebernstein.com. Note to Australian and New Zealand Readers: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is intended only for persons who qualify as “wholesale clients,” as defined in the Corporations Act 2001 (Cth of Australia) or the Financial Advisers Act 2008 (New Zealand), and is general in nature and does not take into account any person’s objectives, financial situation or needs. Note to Readers in Hong Kong: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document is issued in Hong Kong by AllianceBernstein Hong Kong Limited (聯博香港有限公司). This document has not been reviewed by the Hong Kong Securities and Futures Commission. Note to Readers in Japan: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document has been provided by AllianceBernstein Japan Ltd. AllianceBernstein Japan Ltd. Is a registered investment-management company (registration number: Kanto Local Financial Bureau no. 303). It is also a member of the Japan Investment Advisers Association; the Investment Trusts Association, Japan; the Japan Securities Dealers Association; and the Type II Financial Instruments Firms Association. The product/service may not be offered or sold in Japan; this document is not made to solicit investment. Note to Readers in Singapore: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document has been issued by AllianceBernstein (Singapore) Ltd. (“ABSL”, Company Registration No. 199703364C). AllianceBernstein (Luxembourg) S.a r.l. is the management company of the Portfolio and has appointed ABSL as its agent for service of process and as its Singapore representative. AllianceBernstein (Singapore) Ltd. is regulated by the Monetary Authority of Singapore. This advertisement has not been reviewed by the Monetary Authority of Singapore. Note to Readers in Taiwan: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document is provided solely for informational purposes and is not investment advice, nor is it intended to be an offer or solicitation, and does not pertain to the specific investment objectives, financial situation or particular needs of any person to whom it is sent. This document is not an advertisement. AllianceBernstein L.P. is not licensed to, and does not purport to, conduct any business or offer any services in Taiwan. Note to Readers in China: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document is provided by AllianceBernstein (“AB”). This document has been provided to you for sole use in a private and confidential meeting. This document is not an advertisement and is not intended for public use or distribution to any third party beyond our private meeting. This document or any information contained or incorporated by reference herein does not constitute an offer to sell or the solicitation of an offer to purchase any financial instrument, product or service sponsored by AB or its affiliates within the People’s Republic of China (“PRC,” for such purposes, excluding Hong Kong, Macao and Taiwan). AB does not provide tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Note to Readers in Vietnam, the Philippines, Brunei, Thailand, Indonesia and India: For Institutional Investor use only. Not for inspection by, distribution or quotation to, the general public. This document is provided solely for informational purposes and is not investment advice, nor is it intended to be an offer or solicitation, and does not pertain to the specific investment objectives, financial situation or particular needs of any person to whom it is sent. This document is not an advertisement. AB is not licensed to, and does not purport to, conduct any business or offer any services in any of the above countries.
The [A/B] logo is a registered service mark of AllianceBernstein and AllianceBernstein® is a registered service mark used by permission of the owner, AllianceBernstein L.P.
© 2022 AllianceBernstein L.P., 501 Commerce St., Nashville, TN 37203
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© AllianceBernstein
Read more commentaries by AllianceBernstein