Why Do We Not Invest in Some Asset Classes?

As financial advisors and stewards of client wealth, we have the serious responsibility to allocate and manage client portfolios to meet needs and goals.  The global capital markets are vast and so we have a plethora of asset classes and investment vehicles from which to choose. 

We analyze several factors when choosing asset classes and ultimately specific funds or securities to include in customized client portfolios.  These factors include the potential for income and appreciation, tax impacts, costs, risks, volatility, and the level of liquidity.

Our investment approach assigns great value to liquidity.  Why? For 2 main reasons;

• First, because client’s objectives and needs can change quickly and unexpectedly, possibly requiring higher cash withdrawals sooner than planned.
• Second, an investment with limited liquidity raises the risk that other investors’ behavior will affect the ability to sell the investment at a reasonable price.

What are Private Credit Funds?

Private credit, also known as direct lending, refers to loans issued by non-bank lenders to businesses, typically involving privately negotiated terms. These loans are often customized and can include various types of financing, such as secured loans with floating interest rates.

Unlike public debt/credit, private credit is not publicly traded and is usually tailored to the specific needs of the borrower.  This customization and illiquidity mean that lenders can demand higher yields than publicly traded debt.  Unlike publicly traded credit, private credit carries illiquidity, opacity, borrower concentration, and bespoke structures, all of which complicate evaluation and oversight.  Private credit and funds of such have grown significantly since post-financial crisis regulations discouraged traditional banks from serving riskier borrowers.

Since Fall, there have been a string of companies backed by private credit that have declared bankruptcies, raising alarms about the asset class.  More recently, some private credit funds have restricted or suspended withdrawals, increasing concerns and causing some investors to redeem as much as they can.  When sentiment turns, even modest redemption activity can force managers to raise cash, trim deployment, or rely on financing lines, creating operational strain.

In summary, illiquidity and lack of transparency:  This is why we have chosen not to invest in private credit funds, despite the growth of the asset class and the tempting higher yields offered by some funds.