Phil Baur, SVP and Portfolio Specialist at Calamos Investments and former pro baseball player, dives into the intriguing world of private credit. He breaks down how it differs from high yield lending, and the advantages it offers during economic fluctuations. The conversation highlights emerging opportunities in commercial real estate and the importance of risk assessment for financial advisors. Baur also touches on the structural aspects of private credit funds, emphasizing modern underwriting and diversification strategies.
Private credit has outperformed traditional bank loans and high-yield markets by three to four percent over the past 15 to 20 years, attracting investors amid market volatility.
The introduction of interval funds has made private credit more accessible, offering investors a blend of liquidity and a focus on long-term performance without forced liquidation pressures.
Deep dives
The Rise of Private Credit
Private credit has gained prominence in recent years, particularly due to its performance history and the comfort investors have developed with the asset class. Over a span of 15 to 20 years, private credit has consistently delivered net returns that surpass traditional bank loans and high-yield markets by three to four percent, net of fees. This increasing acceptance is further fueled by the introduction of various fund structures, including interval funds and non-traded business development companies (BDCs), making private credit more accessible. The shift in investor focus coincided with a volatile market environment in 2022, where correlations between stocks and bonds rose, prompting many to seek refuge in private credit as a reliable income source.
The Dynamics of Direct Lending
Direct lending is a prominent feature of the private credit landscape, representing loans made directly to companies rather than through banks. The regulatory environment post-Global Financial Crisis compelled banks to retreat from certain lending practices, creating space for private credit to flourish. In 2023, a significant trend in direct lending has been the focus on lower-middle-market companies generating between $20 million and $50 million in earnings, which often face barriers in accessing traditional financing. By providing financing to these businesses, private credit lenders are not only filling a void left by banks but also capturing a lucrative opportunity as competition in the upper echelon declines.
Navigating Risks in Private Credit
Investing in private credit presents unique risks, with concentration and vintage risk identified as significant concerns. The concentration risk arises from the dependence on specific segments of the market, which can become less favorable over time, while vintage risk pertains to the potential downturn in economic conditions affecting previously underwritten loans. Yet, the structures designed within private credit minimize these risks, allowing for better resilience during downturns. The asset class traditionally experiences lower levels of volatility compared to high-yield bonds, with the investment philosophy promoting a long-term approach that avoids forced selling.
The Value Proposition of Interval Funds
The introduction of interval funds has revolutionized access to private credit, allowing for a blend of liquidity and investment in illiquid assets. These funds offer quarterly redemption opportunities for investors while maintaining a focus on a significant private credit portfolio, thus protecting against market dislocations. The use of an interval fund structure also means that managers can selectively underwrite loans without the pressure of forced liquidation, enhancing the long-term performance potential. Additionally, the absence of traditional incentive fees aligns the interests of managers and investors further, contributing to the overall value proposition of investing in this space.
On this episode of Animal Spirits: Talk Your Book, Michael Batnick and Ben Carlson are joined by Phil Bauer, SVP and Portfolio Specialist at Calamos Investments to discuss how private credit differs from high yield, intricacies around specialty finance lending, opportunities in commercial real estate lending, and much more!
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Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here:
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