Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Private Credit for Yield
Transcript
- Lucas: If you've looked at a ten-year Treasury yield lately, you know we're still in an environment where traditional bonds don't offer much excitement. So where are wealthy families putting their cash to work beyond stocks and bonds? Luna: I'm guessing private credit is going to come up—it's been growing like crazy. I think the market is now over a trillion and a half dollars. Lucas: You're right on. As of mid-2026, the private credit market is roughly one point seven trillion dollars globally. That's up from about one trillion just four years ago. And it's not just institutional investors anymore—family offices and ultra-high-net-worth individuals are now major players. Luna: So what exactly is private credit? Is it just loans that banks used to make? Lucas: Exactly that. Private credit is essentially direct lending to companies—usually middle-market firms with EBITDA between ten and a hundred million—that don't have access to public bond markets. Instead of a bank or a syndicated loan, they borrow from a private fund managed by firms like Blackstone, Apollo, or Blue Owl. Luna: And the yields are in that eight to twelve percent range, right? That's a huge premium over investment-grade bonds. Lucas: Yes, but there's a reason for that premium. These loans are typically floating-rate, so they offer protection if rates rise, but they're also illiquid—locked up for three to seven years. And they're not rated by agencies, so due diligence is entirely on the manager. Luna: Let's talk about how families actually access this. Through business development companies, or BDCs, I assume? Lucas: That's one of the main vehicles. BDCs like Blackstone's BXSL or Blue Owl's OBDC are publicly traded, so they offer some liquidity. But the larger allocation often comes through private funds with higher minimums—say, one million dollars or more—and longer lock-ups. Luna: So the trade-off is yield versus liquidity. Most advisors would say private credit should be no more than ten to twenty percent of a portfolio, right? Lucas: That's the conventional wisdom, and it's sensible. But I've seen some family offices push it to thirty percent when they have a long time horizon and stable cash flows. The key is matching the illiquidity to the liability stream—you don't want to be forced to sell in a downturn. Luna: Speaking of downturns, how did private credit hold up during the 2023 regional banking crisis? That was a big stress test. Lucas: Surprisingly well, actually. Because the loans are floating-rate and often secured, default rates stayed low—around one to two percent. And the crisis actually accelerated the shift: banks pulled back on lending, and private credit stepped in to fill the gap. It reinforced the narrative that private credit is now a permanent part of the capital stack. Luna: So for a wealthy family today, what's the first step? Do they go with a BDC for liquidity, or a fund for higher yields? Lucas: Most start with a BDC. It's easier to get exposure with a smaller check, say, a hundred thousand dollars, and you can sell on the exchange if needed. But if they're serious about allocating, they'll work with a private wealth advisor to access a top-tier fund like Blackstone's private credit vehicle or a direct lending fund from a firm like Golub Capital. Luna: And what should they watch out for? Besides the obvious illiquidity. Lucas: The biggest risk is manager selection. Not all private credit is created equal. Some managers focus on senior secured loans, which have first claim on assets in a default, while others take on more risk with mezzanine debt. The difference in recovery rates can be huge—senior lenders might recover eighty cents on the dollar, while mezzanine lenders may get only thirty. Luna: So it's really about the quality of underwriting and the structure of the deal. That's where an experienced manager earns their fees. Lucas: Exactly. And that's also why I think this is an area where paying a slightly higher management fee is justified—if the manager has a strong track record through cycles. A twenty or thirty basis point difference in fees is trivial if the manager avoids a big default. Luna: Lucas, this deep dive into private credit has been really helpful for thinking about portfolio construction. And it's exactly the kind of conversation we love having on this show—no fluff, just practical insights. Lucas: I'm glad it's useful. And you know, conversations like this are why we keep the show free and ad-free. If you find value in what we do, you can support us at buy me a coffee dot com slash fexingo. It helps us keep doing deep dives like this without any outside pressure. Luna: Absolutely. Even just a small contribution goes a long way for us. We really appreciate everyone who helps out. Lucas: Now, one more nuance I want to hit on: the role of private credit in a rising rate environment. Because these loans are floating-rate, they actually benefit from higher rates in the short term. That's a different risk profile than fixed-rate bonds, which lose value when rates rise. Luna: Right, so private credit can act as a hedge against inflation in a way that traditional bonds can't. But what about the downside if rates fall? Lucas: Then yields would compress, and borrowers might refinance at lower rates, which hurts returns. But many private credit loans have prepayment penalties or make-whole clauses that protect the lender. So the investor isn't entirely exposed to refinancing risk. Luna: So it's a trade-off—floating-rate gives you upside in rising rates but some protection on the downside. That's a compelling risk-return profile. Lucas: It is, and that's why private credit has become such a staple. But I'd caution that the asset class is still relatively untested through a full credit cycle. The last major default wave was 2008-2009, and the private credit market was much smaller then. We haven't seen how these funds perform when defaults spike to five or six percent. Luna: That's a fair point. Investors should go in with eyes open. But for families with a long horizon and a tolerance for illiquidity, the extra yield can make a real difference in portfolio outcomes. Lucas: Agreed. So to sum up: private credit offers eight to twelve percent yields, is accessed via BDCs or private funds, requires careful manager selection, and should be sized based on your liquidity needs. It's not for everyone, but for wealthy families, it's a tool worth understanding.