Debunking the myths surrounding private credit

Note: This interview was recorded on 8 October 2024. You can watch the video or read an edited summary below. 

There are a couple of misconceptions currently clouding the private credit world. Firstly, that it solely focuses on real estate assets or loans. And secondly, that it is illiquid and thus more risky than listed fixed income assets. 

However, Kelli Marti, from Churchill Asset Management by Nuveen believes these are myths that need to be debunked, arguing that the universe of private credit is far broader than investors would think - and can include venture capital, distressed and special situation opportunities, equity co-investments, senior secured floating rate investments, junior capital investments, second lien loans, and more - without even accounting for real estate loans. 

"The asset class is much wider than perceived in the market, and the specific subcategories of the asset class are nuanced as well," she says. 

She also argues that the due diligence involved in selecting companies within private credit portfolios helps reduce risk - despite the asset class being "illiquid" in that the opportunities are private. 

"We're spending weeks analysing these borrowers and assessing these investment opportunities," Marti says. 

"While the borrowers are typically smaller from an earnings perspective than those in the public markets, we don't view these assets as having more risks because... selectivity is about 5% of the asset opportunities that we see. So again, smaller borrowers, but they're hand-selected to be what we view to be the most positive performers in the asset class." 

As part of Livewire's 2024 Alternatives in Focus series, Livewire sat down with Marti to learn more about the risks and opportunities she is seeing in the asset class today, why the asset class remains attractive in a rate cutting cycle, and an example of an opportunity the team has recently invested in. 

What is private capital? 

Broadly speaking, private capital is a loan transaction between a non-bank lender and a company or specific asset. Private capital, or private credit as it's known in Australia, is not publicly traded - so it is not liquid. 

The market currently expects the US Federal Reserve's cash rate to continue on its path south over the next two years. It comes after the Fed's surprise 50 bps rate cut back in September.

"We are seeing that flow through into the underlying base rates of the assets that we're underwriting. And the expectation into 2025 is those rate cuts will continue," Marti says. 

"We've had the Secured Overnight Financing Rate (SOFR) or our base rate under underlying assets sit at about 530 basis points for many quarters now. We're now starting to see that come below 500 basis points currently. And again, the expectation is we're going to see further declines into 2025." 

Yields in private credit are comprised of three elements, Marti explains, including the base rate - in this case, SOFR, the base rate plus the spread on the underlying asset, and a slight discount when agreeing to the loan. 

An example of an opportunity

When looking for opportunities, Marti and her team are on the hunt for quality management teams, and competitively positioned companies - particularly those with market-leading positions, with strong financial histories. 

The case for alternatives in your portfolio

Private credit is included within the "alternatives" bucket of a portfolio. Allocations to private credit within this part of the portfolio can vary depending on whether an investor subscribes to the 60:40 rule or another allocation strategy. 

Marti notes that she's seen some investors allocate up to 10% of their portfolios to alternatives. However, she argues that as education surrounding alternatives improves, the momentum and volume of flows in the asset class will continue. 

• 0:00 - Intro 
• 0:26 - What is private capital? 
• 0:57 - Does private capital have a cycle? 
• 2:06 - Will the momentum in private markets continue? 
• 3:18 - Misconceptions of private credit 
• 5:27 - Risks investors need to be aware of 
• 6:28 - Interest rate outlook and what this means for private credit 
• 7:57 - Tightening spreads and competition in private credit 
• 8:53 - How Churchill Asset Management identifies opportunities 
• 10:44 - An example 
• 12:13 - Return and income outlook for private credit 
• 13:39 - Where private capital sits within the portfolio 

Learn more about the Nuveen Churchill Private Credit Income Fund here.