Episode 305 - Is Private Credit Special?
The Rational Reminder Podcast
Unpacking Private Credit Funds
Exploring the intricacies of private credit funds, this chapter discusses the risky borrower lending practices and high fee structures involved. It touches on the challenges of valuation, the equity-like features of private loans, and the discrepancies in returns and volatility compared to publicly traded assets. Emphasizing the need for understanding risks, the conversation reveals the complexities and potential drawbacks of investing in private credit.
Private credit is one of the fastest-growing asset classes, and today we take a closer look at why that is, and if it’s really worth the hype. When you invest in private credit, you are essentially lending money to borrowers who might have difficulty accessing loans elsewhere. While these assets may be profitable, they can also incur a lot of risk and typically come with illiquidity. It is traditionally traded among institutional and accredited investors, rather than retail investors, namely, non-professional investors. Since private credit has gained so much popularity in recent years, we use today’s conversation to unpack how private credit works, the role of private credit funds, the associated performance fees and risks, and what retail investors should know about this asset class before deciding to invest. Our conversation investigates one of the top reasons for private credit’s rise in popularity, namely risk-adjusted returns, before evaluating whether this is a worthwhile reason to invest, depending on who you are. Stay tuned for our after-show section where we discuss the proposed changes to the capital gains tax, why the death of value could be exaggerated, and more!
Key Points From This Episode:
(0:00:18) Today’s main topic, private credit, and our upcoming webinar on May 22nd.
(0:02:18) An introduction to private credit as an asset class.
(0:05:33) Private credit funds: how they work, interest rates, performance fees, and valuations.
(0:08:14) Who does valuations on private credit funds and related risks.
(0:10:01) Unpacking the underlying risks of private credit and how investors are compensated.
(0:11:02) Insights from the paper ‘Direct Lending Returns’ related to publicly listed business development companies (BDCs).
(0:16:15) Takeaways from the paper ‘Risk Adjusting the Returns of Private Debt Funds’.
(0:18:16) Private credit funds, equity exposure, how private credit gets misrepresented, and what investors need to know about high-fee investment products.
(0:25:09) Illiquidity and what retail investors can expect from private credit.
(0:30:15) Our aftershow segment, starting with the proposed changes to capital gains tax.
(0:33:55) Ben’s conversation with David Chilton.
(0:36:55) The value premium and why the death of value could be exaggerated.
(0:40:45) Unpacking the heated response to our conversation with Scott Galloway.
Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/
Mark McGrath on X — https://twitter.com/MarkMcGrathCFP
Webinar May 22nd: Optimal Compensation Strategies for Business Owners — https://us06web.zoom.us/webinar/register/3317145039436/WN_GYudVJCYSnyF8HfUx9UbJQ
Money Scope Episode 12 — https://moneyscope.ca/2024/04/19/episode-12-paying-yourself-as-a-canadian-business-owner/
Money Scope Episode 13 — https://moneyscope.ca/2024/04/26/episode-13-optimal-compensation-from-a-ccpc/
Rational Reminder Episode 220: Jonathan Berk and Jules van Binsbergen — https://rationalreminder.ca/podcast/220
Rational Reminder Episode 210: Ludovic Phalippou — https://rationalreminder.ca/podcast/210
David Chilton — https://thewealthybarber.com/
David Chilton on X — https://twitter.com/wealthy_barber?lang=en
Rational Reminder Episode 303: Scott Galloway — https://rationalreminder.ca/podcast/303
Books From Today’s Episode:
The Wealthy Barber: Everyone's Commonsense Guide to Becoming Financially Independent — https://www.amazon.com/Wealthy-Barber-Updated-3rd-Commonsense/dp/0761513116
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Papers From Today’s Episode:
‘Direct Lending Returns’ — https://rpc.cfainstitute.org/en/research/financial-analysts-journal/2023/direct-lending-returns
‘Risk Adjusting the Returns of Private Debt Funds’ — https://www.nber.org/papers/w32278
‘An Inconvenient Fact: Private Equity Returns & The Billionaire Factory’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820
‘Reports of Value’s Death May Be Greatly Exaggerated’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3488748
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