In research published in the Journal of Private Markets Investing, they contend that the asset class produces limited alpha, or extra compensation over market benchmarks.
“Private credit performance is both lacking in alpha as well as a timely return of capital,” Jeffrey Hooke, one of the authors of the research, said in an interview. “The two main marketing points of the industry seem to be illusory.”
Their critique comes at a sensitive time for the market.
Managers of the booming asset class are on the defensive as a pair of blow-ups exposes stress in corporate loans and JPMorgan Chase & Co. boss Dimon points the finger at publicly-traded vehicles that hold private-debt investments.
See also: National University of Singapore to sell US$500 million in PE and real estate funds: Bloomberg
The barb prompted a prominent private credit executive, Blue Owl Capital’s Marc Lipschultz, to suggest Dimon look for “cockroaches” closer to home — at banks.
For the past decade, the US$1.7 trillion private credit industry has ridden high on a swell of inflows built on the premise they will deliver annual returns close to 10% through bear and bull markets, all while keeping defaults and volatility low.
See also: Investors want liquidity, customisation, co-investment in private credit, law firm finds
The academics took a harder look at these assumptions by questioning how funds account for the “residual value,” loans that are yet to be repaid, analysing returns on 262 North American private debt funds based on their total value to paid-in (TVPI) performance collected by Preqin.
On a TVPI basis, private credit returned more than leveraged loans in four of six years, and leveraged loans outperformed private credit in two years. The study’s benchmark for loans was Invesco’s exchange-traded fund, BKLN, which tracks a Morningstar Inc. leveraged loan index.
To be sure, the sample group largely consisted of closed-end funds that lend mainly to middle-market companies. Newer funds from industry stalwarts target loans to large-cap companies and investment-grade borrowers. They also use evergreen structures to deliver faster returns and replenish assets more often.
And a more widely accepted measure of performance is IRR, or the internal rate of return that claims to offer a view of how a fund is performing through time. On that basis, direct lenders have been handing their investors gains of 9.1% for two decades, according to research from LSEG/Cambridge, as of the end of 2024.
Such a return “is exactly what I think most clients would want or expect from their private credit allocations,” said John Cocke, deputy chief investment officer for credit at Corbin Capital Partners.
To provide accurate asset valuations, private fund managers do “implement robust internal controls and board-approved procedures, supported by independent pricing experts,” Jillien Flores, chief advocacy officer of trade group Managed Funds Association, said in a statement.
Still, managers of private funds have different approaches to benchmarking their performance than their peers who oversee publicly traded debt. The latter have to mark down their positions when bad news reduces their value. Managers of private funds have more latitude in deciding what their loans are worth. That leaves a lot of room for interpretation — and ginned-up returns.
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“Valuations can vary significantly and have been a frequent source of contention in the industry,” said Zain Bukhari, associate director of risk and valuations for S&P Global Market Intelligence.
“Mark-to-myth” accounting of unrealised gains “raises serious questions about the transparency, accuracy, and inherent riskiness of reported performance metrics,” according to the academics.
Lingering loans can become a problem if, a decade on, when loans should be paid off and investors paid out, they still constitute a large part of a fund. Funds originated in 2015 derived 30% of their value from this residual in 2024, the study found.
“Older investments tend to have more issues as a fund’s better investments tend to get refinanced or paid off naturally earlier in the fund life,” said Peter G. Williams, co-head of private credit at Cahill Gordon & Reindel. “Ultimately, this is non-investment grade credit, you are going to have instances where investments hit bumps or things need to get restructured.”
Warnings the market may have peaked are stirring angst in what’s been Wall Street’s favorite money spinner of the past five years. And that’s taking place against the backdrop of rising indicators of stress.
If private credit fails to live up to all it promises, the consequences could be far-reaching, according to Hooke at Johns Hopkins. The market’s meteoric growth has been fueled by institutional and sovereign wealth funds — and a recent flood of retail investors and insurers.
“It would be the beneficiaries of the pensions and endowments that will get affected by this,” he said. “The pensioner who worked as a cop or a teacher for decades will have a lower pension than it could be otherwise as a result of this.”
Deals
- Blackstone Inc.’s Clarion Events is in talks to borrow about GBP1.1 billion from private credit lenders that will be used to fund a dividend and refinance existing debt
- Vietnamese conglomerate Vingroup JSC is seeking a US$500 million private credit loan to expand its electric vehicle charging station network across the region
- Temasek-backed private equity firm ABC Impact has secured a US$110 million sustainability-linked loan from DBS and UOB
- JPMorgan Chase & Co. is sounding out investors for a significant risk transfer tied to a US$2 billion portfolio of loans used to buy private jets
- HSBC Holdings Plc plans to issue a significant risk transfer linked to a portfolio of about GBP3 billion of loans
- Bank of America is planning a significant risk transfer tied to a US$3 billion portfolio of loans to private market funds
- General Motors Financial Co. sold US$2 billion of auto loans to at least one investor in a private deal last quarter, a rare case of the auto lending giant turning to non-public markets to get financing
- Dawson Partners packaged private fund stakes into a US$1.2 billion securitisation as it looks to capitalise on growing demand for bespoke debt in the private sector
Fundraising
- Vinci Compass expects a newly launched private equity and credit fund to grow to as much as US$150 million in the next year, according to the firm’s Mexico country head
- Ninety One Plc and Gramercy Funds Management are working to raise funds, with Ninety One aiming to close a US$500 million fund and Gramercy looking to reach US$1.5 billion for a new fun
Job moves
- Private credit manager SLR Capital Partners hired JPMorgan veteran Mac Fowle as president of asset-based lending
- Colbeck Capital Management has hired Michael Smith, formerly of Muzinich & Co, as a managing director as part of its effort to expand its direct lending business
- Apollo Global Management recruited Eiji Ueda, former chief investment officer of one of the world’s largest pensions, to lead its expanding Asia-Pacific business
Chart: Bloomberg
