The Folly of Private Credit - Why the Latest Fad is Flawed

Our goal is to invest money with integrity and effectiveness. Integrity is simple—we do what’s in the client’s interest. Every time. This reduces our decision-making complexity tremendously. We are simply tasked to find the investments that best meet client goals. I wouldn’t want to manage assets another way.

Effectiveness is trickier. We make the best long-term decisions we can with the available information. Of course luck sometimes gets in the way for good or ill. But that’s why we focus on sound thinking. If we think soundly, then our decisions will likely generate positive results over long stretches of time.

Sound thinking leads me to the chart above. One story to tell about the chart is this: Private credit—loaning money to people and businesses that banks won’t—is a great way to earn extra yield in a portfolio. An allocation to private credit would boost the return of a portfolio’s fixed income allocation. If you think private credit sounds risky, then think again because these are pools of loans, meaning that a few defaults won’t sink the ship. Heck, they probably won’t even dent the hull.

Another interpretation is this: The returns on private credit are far better than those on high quality bonds. But if private credit is 67% correlated to the S&P 500, then shouldn’t there be more juice to the squeeze? In other words, for an asset that is very equity-like statistically, shouldn’t investors demand better relative performance than 52.3% (a major private credit fund) versus 338.5% (S&P 500) since inception.

Neither interpretation is right. It’s a matter of framing. Looked at through the lens of fixed income, it’s a no brainer to include some private credit. On the other hand, looked at through the lens of a diversified portfolio, private credit historically hasn’t returned enough to justify its stock-like risk.

Framing aside, we lean into simplicity at JGP. Stocks drive returns, bonds stabilize those returns, and prudent cash management is the oil that keeps the engine running smoothly. There’s many paths to the same investing destination, ours being but one. If you still believe in driving growth with stocks and deriving protection from bonds, then it’s hard to imagine how private credit adds value.

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