After the global financial crisis, the Fed’s zero-interest-rate-policy helped keep bond yields low for the better part of the next 13 years. However, with the rise in interest rates over the past eighteen months, fixed income securities now provide much more attractive yields. At present, total return projections for some fixed income categories may rival - or even surpass - the return estimates for equity investments.
For risk-tolerant investors, ‘private credit’ may be worth considering. This investment group has benefited not only from the rise in interest rates, but also the pullback in lending from regional banks. These banks are traditional lenders to middle-market companies that are often too small for larger-scale, Wall Street-driven underwriting. Unfortunately for these firms, regional banks are currently under pressure to shore up their balance sheets, which has reduced their appetite for lending. The result is that middle-market companies have found themselves in need of new financiers. Enter the private credit firms… The chart below, which was produced by KKR (a large private credit lender), shows the change in projected returns over the past 18 months.
While the 12.75% projected return may be head-turning, it is important to remember that private credit is more risky than other types of fixed income investments. That said, it is easy to see how an allocation to private credit may boost returns in a fixed income portfolio. This gives rise to the possibility of earning equity-like returns from an investor’s fixed income allocation.
Disclaimers: Investments in private credit have unique risks including limited liquidity. An investment in private credit may not be able to be liquidated for a prolonged timeframe. A private credit investor should understand this and be able to sustain investment losses including the entirety of his or her investment.