Is Private Credit Replacing Core Equity? Same Returns, Less Risk.

In recent years, the private credit market has experienced explosive growth, emerging as a compelling alternative to traditional bank lending. As of 2024, the global private credit market is estimated at approximately $1.5 trillion, with projections suggesting it could reach $2.8 trillion by 2028. morganstanley.com

Understanding Private Credit

Private credit involves non-bank institutions providing loans to companies, often characterized by higher yields and highly tailored financing solutions. This asset class has gained traction due to its potential for attractive risk-adjusted returns and portfolio diversification.

Factors Driving Growth

Several key factors have contributed to the expansion of private credit:

• Bank Lending Retraction: Post-Global Financial Crisis regulations have led banks to reduce lending activities, creating a financing gap filled by private credit providers. pimco.com
• Investor Demand: Institutional investors, including family offices, seek higher yields in a low-interest-rate environment, making private credit an appealing option.
• Market Opportunities: Economic shifts and market volatility have increased demand for flexible financing solutions, with private credit stepping in to fill the gap.

For a visual representation of the private credit market’s growth, consider the following chart:

Source: HarbourVest

Comparing Private Credit to Traditional Investments

When evaluating private credit against traditional “safe” investments like bonds and index funds, several distinctions emerge:

• Returns: Private credit often offers higher yields than traditional fixed-income investments, such as bonds, because it allows investors to price risk at a premium. Unlike bonds, which are often subject to market-driven yield compression, private credit structures can negotiate stronger covenants and fixed returns, leading to more predictable alpha generation for investors.
• Risk Profile: While private credit can provide higher returns, it may also come with increased credit risk, especially in economic downturns. However, unlike equity investments, which carry high beta and move with market cycles, private credit’s risk is primarily tied to borrower fundamentals rather than broad market fluctuations. Senior secured loans within private credit offer a level of downside protection, making them more resilient than many public market alternatives. am.gs.com
• Liquidity: Traditional bonds and index funds typically offer higher liquidity, making them more attractive for short-term allocations. However, this liquidity comes at a cost—returns are often lower, and market exposure is unavoidable. Private credit, by contrast, requires a longer-term commitment but compensates with stronger yields and insulation from daily market volatility. Investors willing to sacrifice liquidity can benefit from more stable, contractual returns rather than riding beta-driven market waves.

For a comparison of private credit returns versus traditional fixed-income investments, refer to the following chart:

Source: Bond Adviser

Opportunities for Family Offices

For family offices, private credit presents several advantages:

• Enhanced Yields: Potential for alpha generation compared to traditional fixed-income investments.
• Diversification: Access to a broader range of investment opportunities across various industries and geographies.
• Control and Customization: Ability to negotiate terms directly, aligning investments with specific risk tolerances and objectives.

Considerations and Risks

While private credit offers notable benefits, it’s essential to consider potential challenges:

• Illiquidity: Investments may be less liquid than public securities, requiring a longer-term commitment.
• Credit Risk: Exposure to borrower defaults, especially in economic downturns.
• Regulatory Environment: Evolving regulations may impact the operations and returns of private credit investments.

Final thoughts

The private credit market’s growth reflects a dynamic shift in global finance, offering promising opportunities for family offices seeking diversification and enhanced returns. However, it’s crucial to conduct thorough due diligence and consider the associated risks to align with long-term investment strategies.

The rise of private credit isn’t just reshaping global finance—it’s directly influencing how capital flows into real estate. As lenders put a vice grip on credit standards, they are suffocating borrowers’ access to capital, making traditional financing an increasingly elusive option.This shift presents both opportunities and risks for family offices and institutional investors looking to deploy capital into real estate-backed loans, bridge financing, and structured debt solutions.

At the same time, public markets provide key insights into where private credit is heading in real estate. The struggles of publicly traded REITs, fluctuating cap rates, and rising debt costs in CRE offer a preview of how capital availability and valuations will play out in private real estate markets. While the public real estate sector reacts in real time to economic conditions, private credit allows investors to structure deals with stronger covenants, collateral protections, and negotiated terms, creating a more controlled risk environment.

Where Do We Go from Here?

As public market data continues to highlight financing challenges in commercial real estate, private credit has become a necessary tool for those looking to deploy capital strategically. The question isn’t whether private credit will continue to grow—it’s how investors will use it to navigate the evolving real estate cycle.

-AM