CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
Priya Thakur, CFA
Analyst
Franklin Templeton Institute
Jake Williams
Head of International Product Strategy,
Wealth Management Alternatives
Arthur Thomson
Alternatives Product Strategy Specialist
Preview
Private credit is still a relatively new asset class that represents a diverse group of underlying strategies including direct lending, special situations/distressed, asset-based financing (ABF), commercial real estate debt (CRE debt), and collateralized loan obligations (CLOs), among others. As the market has matured, and demand has risen, advisors are increasingly asking how to effectively allocate capital to private credit.
In this paper, we will examine the growth and evolution of private credit, and how history is repeating itself within the private credit universe. We will discuss the unique risk, return and income characteristics of the various sub-strategies. We will explore the relative attractiveness of each of these strategies in today’s market environment, discussing how its place in an investor’s portfolio should evolve and be viewed as a fixed income replacement.
The insights provided in this paper highlight the importance of developing an appropriate strategic asset allocation based on the current macro conditions and compelling historical data. We believe that commercial real estate debt represents a viable alternative to traditional fixed income options.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. Diversification does not guarantee a profit or protect against a loss.
Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.