A multi-sector approach to semi-liquid private credit

Three characteristics to look for when investing in semi-liquid private credit strategies

When considering investing in a semi-liquid strategy, we suggest considering the following three attributes:

1) Multiple Sources of Yield and Yield

The range of semi-liquid strategies has expanded considerably in recent years, but most remain focused on one sector: corporate lending. Within private credit, the set of opportunities is much broader than the many middle market direct lending strategies suggest. A strategy that can flexibly invest across the broad spectrum of private credit allows an asset manager to invest only in what they see as the best opportunities, while potentially improving portfolio diversification.

2) A well-structured “liquidity pocket”

Since these strategies invest in private and generally less liquid assets, it is important to ensure that the liquidity offered is reliable and concentrated in higher quality assets. Typically, managers achieve more frequent liquidity by allocating a portion of the asset mix to more liquid traded securities or a “liquidity sleeve”. But investors need to ask themselves: is this allocation enough to give investors cash when they need it most? Do the securities offer an attractive return without introducing additional volatility? We believe that a well-designed liquidity structure is just as important as finding attractive private investments.

3) Sustainable distribution returns

High payout yields that are above or similar to total return targets or yields to maturity can be a red flag. With the addition of fees, one or two defaults in a portfolio could potentially set investors on the path to lower net asset value (NAV). More conservative payout yields have the potential to withstand periods of stress should they emerge and prepare investors for more stable and robust long-term gains.

The global macroeconomic environment remains anything but normal, and investors will need to navigate a volatile and difficult path over the next few years. As we enter an environment of higher interest rates, uneven growth and uncertain inflation, traditional capital market returns are likely to become lower and more volatile.

We believe that a dynamic, multi-sector approach to semi-liquid private credit, designed to be resilient and seeking to provide consistent income, could play an important structural role in the portfolios of many investors.

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