Family Office Perspective on Private Credit vs Liquid Credit

Family Office (FO) clients usually hold a lot of fixed income

Family Office (FO) clients usually hold a lot of fixed income. Even avid risk takers with entrepreneurial backgrounds value capital preservation and diversification from their core businesses. However, the era of ultra-low interest rates has not spared this warm relationship. With bond yields not clearing target return hurdles anymore, FO advisors need to look for alternatives. One alternative often overlooked is niche short-term private credit funds.

If we ask an FO client about their expectations for the “stable” part of the portfolio, we may hear a variation of the following three desired characteristics:

> A high enough average return beating some mental benchmark (say, 4-7% in USD terms), preferably with some current income

> Relatively stable monthly return pattern, with a negative month a rare exception, and low correlation to other markets

> Relatively high liquidity, preferably allowing an opportunistic tactical rotation into riskier asset classes in times of overall market stress

The two common paths to increasing returns are either more credit risk or lower liquidity, represented by high-yield (“junk”) bonds and private credit, respectively. The yield pick-up is significant, while default rates are consistently better than expectations since at least 2009.

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