Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Family Offices Use Private Credit for Yield
Transcript
- Lucas: So there's a quiet shift happening in how wealthy families are building their portfolios, and it's not in stocks or bonds. It's private credit. Luna: You mean lending money directly to companies, bypassing the banks? Lucas: Exactly. And it's not just a niche anymore. A recent survey suggested that over half of family offices now have some allocation to private credit, and many are planning to increase it. We're talking about a market that's grown to over one and a half trillion dollars globally. Luna: That's a lot of money. But what's driving the appeal now, especially in August 2026? Lucas: The short answer: yield. After years of near-zero rates, the environment changed, and even with rates normalizing, private credit still offers a premium over public bonds. You can get a hundred to two hundred basis points more than investment-grade corporate debt, sometimes more. Luna: And that premium comes with a catch, right? Liquidity. Lucas: Right. You're locking up your money for five to seven years, sometimes longer. But for a family office with a long-term horizon, that's often acceptable. They don't have the same liquidity needs as a mutual fund. Luna: So what does a typical private credit deal look like for a family office? Lucas: Let's take a concrete example. Imagine a mid-sized manufacturing company, say a specialty components maker with fifty million dollars in revenue. They need forty million to fund an acquisition. The bank might offer a loan but with restrictive covenants and a slow process. A private credit fund or a family office can step in with a term loan, maybe six years, floating rate, secured against the assets, pricing at SOFR plus six hundred basis points. Luna: SOFR plus six hundred — that's a juicy yield, but what's the default risk? Lucas: That's the key. The risk is real, but private credit managers do extensive underwriting. They often hold the loan to maturity, so they're incentivized to pick companies that can actually repay. And they structure with covenants that give them early warning if things go wrong. Luna: Still, it's not like buying a Treasury. There's no FDIC insurance, and you can't just sell the loan when you want. Lucas: Exactly. And that's why it's not for everyone. But for a family office with a diversified portfolio, private credit can be a stable income stream, especially compared to the volatility of equities. Luna: I've also heard of BDCs — business development companies. Are those a common route for family offices? Lucas: They are, for smaller ones that don't have the scale to do direct deals. BDCs are publicly traded or private vehicles that lend to middle-market companies. They offer some liquidity, especially the listed ones, and they pay high dividends. But you have to watch the leverage and the quality of the loan book. Luna: So it's a way to get exposure without committing to a single deal. Lucas: Right. And some family offices co-invest alongside BDCs or private credit funds, getting the same deals but with more control. That's a growing trend — co-investment platforms that allow families to pick specific loans or portfolios. Luna: Now, what about the impact of the current rate environment? We've seen the Fed hold rates steady for a while. How does that affect private credit? Lucas: Since most private credit loans are floating rate, they adjust with SOFR. So when the Fed hiked, these loans paid more. Now that rates have plateaued, the yield is still attractive, but the upside from future hikes is limited. Still, with inflation around three percent, a six to eight percent yield gives a real return. Luna: But there's also the risk that some of these loans were made at the peak of the cycle, and now companies are struggling to service that debt. Lucas: That's the concern. Default rates in private credit have been creeping up, though still low historically. Some sectors, like retail and certain tech subsegments, are under pressure. The key is diversification — not just across sectors but across vintage years. Luna: So it's not a set-and-forget investment. Lucas: No, it requires active monitoring and a manager who knows how to work out troubled loans. But that's where family offices have an edge — they can afford top-tier managers and often negotiate better terms. Luna: I imagine many listeners are thinking, 'This sounds great, but I can't lock up millions for seven years.' Lucas: True, but there are ways for individual investors to get a taste. Listed BDCs offer liquidity, and some private credit ETFs have emerged. They don't have the same premium, but they provide diversification and daily liquidity. Luna: So the strategy for the wealthy is not just about the yield, but about the risk-adjusted return and the illiquidity premium. Lucas: Exactly. And that's a lesson for everyone: sometimes giving up liquidity can buy you a better return. But it only works if you have a long enough horizon and can tolerate the risk. Luna: It's funny we're talking about this today. I was just thinking about how our conversation is essentially helping people think about their own portfolios, even if they're not at the family-office level. Lucas: That's the thing — if today's episode gave you one new way to think about yield or risk, that's what we're here for. And if you've found value in these conversations, the way we keep this show going with zero ads is through listener support. You can buy us a coffee at buy me a coffee dot com slash fexingo. Luna: We really appreciate that. It helps us keep digging into these topics. Lucas: Now, back to private credit. One area that's growing is asset-backed lending — loans backed by everything from aircraft to music royalties. That's another way families diversify beyond corporate cash-flow lending. Luna: Music royalties? That's fascinating. How does that work? Lucas: A fund might buy a portfolio of royalties from a songwriter or a label, then borrow against that asset to fund new acquisitions. The income from streaming or licensing pays the interest. It's an inflation hedge because those royalties often have escalators. Luna: So it's like a bond with a bit of a different flavor. Lucas: Exactly. And the same logic applies to aircraft leasing or even data centers. These are tangible assets that generate predictable cash flows, and the loans are structured with built-in cushions. Luna: But with that complexity, isn't due diligence even more critical? Lucas: Absolutely. Some of these assets can be hard to value, and you need specialists who understand the industry. That's why many family offices partner with established private credit managers who have decades of experience in niche asset classes. Luna: So what's your overall takeaway for our listeners, Lucas? Lucas: Private credit is a powerful tool, but it's not a silver bullet. It demands patience, due diligence, and a tolerance for illiquidity. For those who can handle that, it's a way to add a steady, uncorrelated return stream to a portfolio. And for the rest of us, the lesson is to think about what we're really being compensated for. Luna: And maybe that's the ultimate insight — understanding the price of liquidity. Lucas: Well said. That's a good place to leave it for today. Thanks for being here, everyone.