Why we remain cautious on private credit

Private credit covers a wide range of managers, borrowers, loan structures and protections. It would be a mistake to treat it as one uniform investment—or to assume a recent problem at one borrower tells us how every fund will perform.

It would also be a mistake to judge the risk solely by a smooth sequence of published returns. In my original post, I compared reported returns with changes in the composition of one private-credit portfolio. The return line looked remarkably steady; the underlying mix of performing credit, equity-like exposure and assets under enforcement had changed considerably.

A lender expects repayment with interest and may have contractual protections if a borrower runs into trouble. As an exposure becomes more equity-like, recovery can depend much more heavily on the underlying project or asset succeeding.

That does not mean every reclassification produces a loss. It means the apparent stability of a return should not stop us asking what has changed beneath it. Valuations, withdrawal terms, borrower concentration and the path to recovering capital all matter.

We have not used private credit in Life First Advice client portfolios for a number of years, and we remain cautious. The recent credit concerns I discussed in the original post are not, on their own, the reason for that position. They are reasons to keep asking how risks might develop later in a cycle.

Nobody needs to own every asset offering an attractive-looking return. The more important question is what risk is being taken to earn it, and whether that risk belongs in a particular person’s plan.