The Rational Reminder Podcast

Episode 305 - Is Private Credit Special?

May 16, 2024

44:06

Snipd AI

Exploring the rise of private credit, its appeal to investors and businesses, and the risks involved with high fee structures. Discussion on proposed capital gains tax changes, the death of value, and more in the after-show section.

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Quick takeaways

Private credit offers high yields but comes with illiquidity and valuation challenges.

Private credit funds cater to risky borrowers through high-interest loans and fees.

Investors should assess underlying risks and returns before considering private credit investments.

Deep dives

Understanding Private Credit: A Detailed Look at the Asset Class

Private credit, unlike publicly traded bonds, involves loans created by non-bank entities such as private credit funds to support private businesses. Promoted for its high yields and stable returns, it has gained popularity among investors seeking alternatives to traditional fixed income. The rapid growth of this asset class can be attributed to investor demand for high floating rate yields amidst low interest rates and tightened bank capital requirements driving companies towards non-bank credit sources.

Introduction

2min

Unveiling Private Credit: Opportunities and Risks

5min

Unpacking Private Credit Funds

24min

Navigating Uncertainty: Impact of Proposed Capital Gains Changes

3min

Prominent Figure Praises Host for Financial Content

9min

Casual Conversations about Landscaping Projects and Property Transformation

2min

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/