Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / Why Ultra-Wealthy Investors Are Using Private Credit
Transcript
- Lucas: If you've looked at a bond portfolio over the past few years, you know the story: traditional fixed income yields barely keep pace with inflation. So where are ultra-wealthy investors turning? Increasingly, it's private credit. Luna: And we're not talking about high-yield bonds or leveraged loans. This is direct lending to middle-market companies — loans that never trade on a public exchange. Lucas: Exactly. The numbers are striking. According to Preqin, private credit assets under management globally surpassed one point five trillion dollars last year. And a growing slice of that is coming from family offices and high-net-worth individuals. Luna: So why now? Banks used to do this kind of lending. Lucas: They did. But post-2008 regulation made it less attractive for banks to hold middle-market loans on their balance sheets. Then regional bank stress in 2023 accelerated the retreat. Private credit funds stepped into the gap. Luna: And for the investor, the appeal is yield. We're talking what — eight, ten, twelve percent? Lucas: It varies, but yes. A typical first-lien senior secured loan to a healthy middle-market company might yield eight to nine percent. Mezzanine debt, which is subordinated, can go into the low teens. And because these loans are floating rate, they adjust with SOFR plus a spread. So in a rising rate environment, the coupon resets higher. Luna: That's a huge advantage over holding a ten-year Treasury at a fixed four and a half percent. Lucas: Right. But it's not a free lunch. Private credit is illiquid. You're locking up capital for three to seven years typically. And the due diligence is intensive — you can't just buy an ETF and forget it. Luna: I want to talk about a specific deal I came across recently. A single-family office in New York structured a fifty million dollar direct lending deal to a healthcare services company in the Southeast. Lucas: I've seen that case. The company was doing about two hundred million in revenue, needed acquisition financing, and the family office provided a first-lien term loan at SOFR plus four fifty — so roughly nine and a half percent at current rates. Luna: And the collateral was accounts receivable and equipment. The loan to value was around forty percent. Pretty conservative. Lucas: That's typical for direct lending done well. The family office hired an external credit analyst to review the borrower's financials and industry outlook. They negotiated covenants like a minimum fixed-charge coverage ratio. It's active, hands-on investing. Luna: And the return — nine and a half percent — on a senior secured basis, that's compelling compared to public high-yield bonds which are yielding closer to seven. Lucas: But here's the thing. Liquidity premium is real. If you need to exit early, there's no liquid market. Some funds offer quarterly redemption gates with caps, but most direct loans are held to maturity. Luna: So this isn't for an emergency fund. It's for the portion of a portfolio that can tolerate lockup. Lucas: Exactly. And that's why family offices with long time horizons are natural allocators. They're not worried about quarterly mark to market volatility. They care about cash yield and principal preservation. Luna: How are they accessing it? Through dedicated funds or direct origination? Lucas: Both. Larger family offices with in-house investment teams may originate deals directly — like the healthcare loan we mentioned. Others use commingled funds from managers like Golub Capital, Ares, or Owl Rock. Those funds offer diversification across dozens of loans. Luna: And the fees? That's always a consideration. Lucas: Management fees typically run one to one and a half percent, plus a performance fee of fifteen to twenty percent over a hurdle. Direct origination avoids the management fee but requires internal expertise. Luna: So the net return to the investor might be closer to seven or eight percent after fees in a fund structure. Lucas: Still attractive relative to public fixed income. And there's an additional benefit: floating-rate exposure. In an environment where central banks are cautious but rates stay elevated you get that inflation hedge. Luna: Let's talk about risk. Default rates in private credit are lower than high-yield bonds historically, but they do happen. Lucas: That's right. According to Moody's, the annual default rate for private credit has averaged around one to two percent over the past decade, versus three to four percent for public high-yield. But when defaults occur, recovery rates can be higher because of the secured collateral. Luna: And there's less correlation with public markets. That's a diversification benefit. Lucas: Exactly. Private credit returns have a low beta to equities and bonds. In 2022, when the S&P 500 fell nineteen percent and the Bloomberg Aggregate Bond Index fell thirteen percent, private credit returned two to three percent positive on average. Luna: That's the kind of stability that ultra-wealthy investors prize. Lucas: It is. And I think it explains why we're seeing allocations creep up from five percent of a portfolio to ten, sometimes fifteen percent for more aggressive family offices. Luna: Speaking of how listeners allocate — and I don't want to interrupt this thread, but it reminds me that a number of you have asked how we keep this show ad-free. A small group of listeners supports us through buy me a coffee dot com slash fexingo, and that really does make these deep dives possible. Lucas: And we're grateful. It means we can spend time on topics like private credit without worrying about ad sponsors dictating the angle. Luna: So if you find value in these conversations, that's the way to keep them going. Now back to private credit — one thing I want to understand is how due diligence differs from buying a bond ETF. Lucas: It's night and day. With an ETF, you're buying a basket of securities that are already rated and traded. With private credit, you're underwriting a specific company's ability to service debt. You need to analyze cash flow, management quality, industry trends, and collateral coverage. Luna: And the family office we discussed — they did all that in-house? Lucas: They had a two-person credit team supplemented by a third-party diligence firm. The whole process took about eight weeks from initial screening to closing. That's typical for a direct deal of that size. Luna: What about ongoing monitoring? It's not a buy and forget asset. Lucas: Absolutely not. The family office receives quarterly financial statements, monitors covenant compliance, and has the right to inspect the borrower's facilities. They also track industry metrics like healthcare utilization rates for that specific company. Luna: So it's almost like being a private banker. You have a relationship with the borrower. Lucas: Exactly. And that relationship can yield better outcomes in a stress scenario. If the company hits a rough patch, the lender can negotiate a forbearance or restructuring privately without the publicity of a public bond default. Luna: That control is valuable. Lucas: It is. And it's one reason private credit has become a staple in the ultra-wealthy toolkit alongside private equity, real estate, and hedge funds. Luna: So if someone listening is considering allocating to private credit, what's the first step? Lucas: I'd start with education. Read materials from the Institutional Limited Partners Association, look at track records of established managers, and understand the liquidity profile. Then start small — maybe a five percent allocation through a diversified fund. And work with a wealth manager who has experience in alternatives. Luna: And don't chase yield blindly. The highest-yielding deals often come with the most risk. Lucas: Right. The sweet spot is often senior secured first-lien loans to companies with strong free cash flow. That's where you get the best risk-adjusted returns. Luna: And with that, I think we've given our listeners a solid overview. Lucas: Private credit is a big topic, and it's only going to grow as banks continue to retreat. The ultra-wealthy are already there. For others, it's worth a close look. Luna: Thanks, Lucas. And thanks to our listeners for tuning in.