A Detailed Analysis of Private Credit Investing

By Stephen Rosen on March 2, 2023

In recent years we have seen the risks associated with investing in assets that have a very high correlation with the publicly traded markets.

In response, many investors have sought out a safe space with low volatility or none at all.

We have discussed private equities, but what other options are there available?

In this episode, Stephen Rosen delves into the world of private credit investing. He explains how it can be a safe haven during times of market volatility and offers insight into the best times to invest. Stephen also shares the different types of investments available in the private credit space and the importance of working with experienced fund managers.

Stephen discusses:

Basics of private credit and how market volatility has a lower impact on it
The importance of participating in investments individually or with a small group of investors rather than syndicated deals
Who can access private credit investing and the economic scenario in which is more beneficial to invest
Types of private credit investments with their associated risks and benefits
The importance of conducting a proper research before investing in private credit
And more

Connect With Stephen:

Publishing Tags: Approach Investing Differently, Hightower Bethesda, Stephen Rosen, Investing

[00:00:00] You invest your money strictly in stocks and bonds. If so, it’s time to change that. Welcome to Approach Investing Differently with me, Stephen Rosen from Hightower Bethesda. I’ve been advising clients for over 20 years on how to invest in alternative investments, and I’ll explain why you should dedicate a percentage of your investible assets to hedge funds,

[00:00:23] private equity and real estate, in order to maximize returns and create a more efficient investment portfolio. Now onto the show.

[00:00:37] Throughout this podcast series, Stephen Rosen has given us a practical overview of alternative investments and ways they can invest. Very often the tactics are not something everyone can access, and private credit is no exception. I’m Patrice Sikora. Stephen, just the name, private credit suggest this is not something that is publicly traded.

[00:00:59] Tell me about [00:01:00] it. That’s correct. Private credit is not publicly traded, and that’s the whole purpose behind one of the reasons why we like it. But starters, thank you for joining me again today, and I hope our listeners have enjoyed our prior podcasts on alternatives. Private credit is, probably one of the last ones that we have from our educational series of bringing everybody up to speed.

[00:01:21] We’ve got a few more, but I think this is one that’s going to be interesting. Again, we always try to keep these things timeless. But it is one of those things that as we’ll talk about more, has peaks and valleys to its benefits. And there’s times that you definitely want to look at it in times that it’s less attractive.

[00:01:40] We happen to be one of those times now and we’ll get to that. But yeah, so private credit, the whole concept behind it is not publicly traded. So, once you get into things that are publicly traded and private credit is absolutely no different than private equity. Remember, private equity is publicly, you know, privately co owned [00:02:00] companies versus publicly owned companies.

[00:02:02] And what are some of the issues that we always arrive at with publicly traded companies, which is enhanced volatility? Okay. Market’s not always looking at the actual value of the company. It’s not always looking at the earnings of the company. It’s taking a lot of different things. There’s a lot of technical trading that goes around.

[00:02:22] There’s a lot of money movement that goes along in publicly traded markets that ebbs and flows with a new cycle. And one of the reasons why we like private credit is very similar to what goes on in private equity. You, a lot of times, have the ability to filter out, and that to us is very important because what we’re always looking to achieve across all of our portfolios is a lower level of volatility and steadier rates of return.

[00:02:48] And when you can have instruments that are really just designed to ebb and flow with the quality of the investment and whether or not the investment itself is [00:03:00] working and can filter out, you know, some of the noise. You’re never going to filter out all of the noise because even private securities do need to be priced.

[00:03:08] Okay, so it’s not as if they’re not priced. They have to be priced, but they’re not just as volatile as a general publicly traded instrument are privately traded in credit instruments and investments are typically also similar to our private equity funds. Generally, price on a quarterly basis.

[00:03:27] So that strips out a lot of the day-to-day noise as well. But again, similar to our private equity components, we are generally much looking for investments that are private, the general public cannot access. They are available to our fund managers, who have an expertise in doing this. And the illiquid nature of them is also what is very attractive from an access and a performance standpoint.

[00:03:53] Now, this kind of debt, is it something that I, as we just said, it’s not publicly traded, but do just a few entities [00:04:00] own this piece of debt or is it another scrum where lots of people are in there? So, a couple of different ways to look at private debt, and a couple of different terminologies that one can kind of take a look at.

[00:04:13] So, what we look at primarily are investments that are held by usually one investor. Or maybe there’ll be a small group of investors that hold it. We are traditionally, when we look at private investments, we are not looking at what are called syndicated deals. A syndicated deal is basically a very large, debt offer

[00:04:40] that can be accessed by a lot of mutual funds, exchange traded funds, people who are investing, and it’s a publicly traded security that is not private. It has that in level of enhanced volatility. It mirrors the objectives of what privately [00:05:00] held investments are, but those are not really the ones that we are traditionally looking for when we’re talking about private investments.

[00:05:07] Private. On the credit side, we are generally looking for one owner of a security who has been able to do deep due diligence on the asset that they’re looking to purchase. And there’s different types of credit purchases, different types of debt instruments that we can own. And, we’ll get to that in a minute, but the whole notion behind that really is that the fund that we’re with, the investor that we’re with, they are primarily the only holder of that debt instrument.

[00:05:36] And really all they’re looking to do is get their interest rate and their money back when the debt deal matures. And that’s one of the reasons why you don’t have the volatility in private credit that you do at public because these things are not really traded. Okay? People are not coming in and out of them.

[00:05:55] They’re not in mutual funds where, you know, for example, this year in the [00:06:00] mutual fund world, this year being the end of 2022, we’ve had massive outflows of funds from the mutual bond funds. Okay, so people are pulling their money out of bond funds, hand over fist. Well, when people sell a bond fund, the managers of those funds have to go in and sell to raise cash to give the money back to the investors.

[00:06:26] Well, if every bond fund across America is selling, that adds additional pricing pressure to those funds and to the investments that they have, because again, pricing of an investment is supply and demand. If there’s more sellers than buyers, the price is going to go down and vice versa. So when everybody is taking their money out of bond funds for varying reasons, mostly this year because they didn’t think that bonds could go down 15% in value, which they have.[00:07:00]

[00:07:00] You have a kind of a snowball effect that occurs and people are constantly selling all throughout the year, and it just continues to put pricing pressure on all of these bonds. On a private deal, there’s one owner, well, if there’s two owners or three owners and they’re in funds that are locked up, that you are not,

[00:07:22] and so therefore it creates a very different dynamic. No one’s selling it. Well, if no one’s selling it and the bond is performing well and you’re getting your interest rate and there’s no risk, no additional risk of default. There’s no reason to mark a bond down 15%. You’re looking strictly at that actual investment right there.

[00:07:42] And so that’s one of the reasons why we like it. And yes, we are generally looking for non-syndicated deals that are held by one or a small number of investors. Now, we’ll talk on a later podcast about the use of liquid alternative investments, where those dynamics do [00:08:00] change a little bit. But again, the definition of private credit, to your point earlier, is strictly private.

[00:08:08] What entities use private credit. What companies or individuals need private credit. Well, if you ask us, everybody needs private credit. True. Again, there’s qualifications around many of the investments that we look at. As we talked about, going back to probably our first episode, you know, a lot of our investments are only for qualified purchasers, and those are for people with a net worth of 5 million or more.

[00:08:38] But then there’s also plenty of opportunities in the private credit market for accredited investors. Those have much lower qualifications from a net worth standpoint. And there are some, and again, we’ll talk about this in the next podcast. There are some what I’d call pseudo liquid, funds that have much lower minimums, [00:09:00] both from a dollar standpoint as well as an accreditation standpoint where you can access, they’re not completely illiquid but they are mostly private.

[00:09:09] And we’ll address the benefits and the pros and cons of those in our next podcast. Generally, it’s the same concept behind our private equity and our private real estate, which are their specialized managers and specialized funds who trade and invest in these specific areas. And like everything, it’s about understanding who’s good, who’s not, what their objectives are, what their time horizons are, what their risks, tolerance is.

[00:09:36] And really just having an understanding about where you can get the best value from your investment. And again, like anything, sometimes you might have things where you’re looking to take on a little bit more risk. Sometimes you want more plain. It all depends upon the actual client. It also depends upon the strategy that we’re looking for based upon the market environment that we’re in.

[00:09:56] You know, traditionally when you are [00:10:00] potentially heading into a recession, you might not be looking for the most aggressive private credit manager. But on the other hand, understanding that these managers in many instances are investing over a two and a three year time horizon, some of what we have to do is take out our crystal

[00:10:19] and predict the future, and how long do we think maybe a recession is going to last? How deep is a recession going to be? And depending upon our thoughts on that, do you want to start committing money to some of these managers who might be taking out a little bit more risk because you recognize that there’s going to be great opportunities

[00:10:39] as you head into a recession and start to come out of it, because that’s where the opportunities kind of get created in the credit markets. The reason why credit has not been the greatest place to be over the course of the past five or six or seven years is because we’ve had an exceptionally strong economy and a very low interest rate environment. [00:11:00]

[00:11:00] To be completely honest, that’s not the best precursor for private credit investments. There’s actually more risk in that scenario because you are buying loans or taking loans from companies that traditionally are not, let’s call it, you know, IBM, Microsoft. They have some difficulties.

[00:11:23] They have some, it’s honestly difficulties. It’s just that they are not as highly rated as those companies for varying reasons, could be they’re newer companies. It could be they already have some meaningful levels of debt. That doesn’t necessarily mean they don’t have a great pathway to pay back their bonds.

[00:11:41] I mean, let, let’s step back a second. You know, bank loans, for example, is one of the areas that we traditionally like to invest. And most of those loans are to what we would call non-investment grade companies. But the default rate E, even in a recessionary period, is maybe four [00:12:00] or five or 6%. So that means 94-ish percent of the companies

[00:12:06] are paying their dividends and paying back their money. Now, these are not investment grade companies. They’re high yield companies, but 94% of them, even in a high recessionary environment, are paying back their money. So, if you’re good at what you do and you understand the credit analysis that you’re doing as an investment manager, your default rates will generally be lower than that.

[00:12:26] Unless you’re taking on, you know, a lot of risk, which most of the people we look at don’t do. And so, because of this, you want to just be mindful of the risks and if you’re taking these additional risks, let’s remember, the US Treasury doesn’t default on their debt. Okay. It might become less valuable because of the ebb and flows of the dollar or inflation, but they’re not going to default.

[00:12:52] Okay? So, we’re always measuring something against, let’s call it the US Treasury. And so, if the US Treasury is a super low interest [00:13:00] rate, and these high yield companies have super low interest rates, you’re not being compensated a lot to take on risk. And when interest rates go higher, they don’t become the best-looking investments.

[00:13:11] So, in the environment we’re in now where we’ve seen interest rates rise dramatically and we see a potential recession on the horizon, we’re now starting to look at a period of time where, all right, credit might be really interesting. You can start to get much better returns for the risk that you’re willing to take.

[00:13:32] And well, that’s one of the things that we’re looking for, right. You started to mention some types of private credit investments. Why don’t you take that a step further? Sure. So, things like bank loans, which is basically for the most part for us, short term loans that are made to a company. You are

[00:13:52] usually what we call senior secured loans, which is what we’re generally looking at, where you’re probably first in [00:14:00] line to get your money back should the company experience any issues. And one of the reasons why we like that is they are generally asset backed loans. So, there’s assets in the company traditionally, and so even if a company does default, maybe you’re going to get 80, 83 cents back on the dollar, which is your traditional recovery rate in that space versus some other instruments where you might get zero.

[00:14:24] I mean, the company could go completely defunct and bankrupt and there might be no assets there. So, bank loans is something that we like. And then one thing we like about bank loans is that traditionally they are floating rate. So that as the interest rate environment increases, you receive the benefit

[00:14:41] of increased yields, and that’s been something that’s been a very attractive space to be in over the course of the last year or so. Because their duration, the bonds themselves, the loans themselves are very short in nature. And so, a short duration bond with basically an interest coupon that [00:15:00] increases is a very attractive investment vehicle for us.

[00:15:04] And that’s something that we’ve been looking at of late. Then there’s high yield. Those are traditional bonds, you know, we lend money to a company. and they in turn, you know, have to pay you a dividend and eventually pay you back. Again, we’re not dealing with, Amazon and Microsoft here.

[00:15:20] You are dealing with lower rated companies, but again, that’s how you’re going to get the return out of there. One of the interesting quirks of high yield that people sometimes recognize and sometimes don’t recognize is that high yield bonds and the performance of them have a very high correlation to the stock market.

[00:15:41] Okay. And that’s primarily because a strong stock market traditionally signifies a strong economy. A strong economy traditionally signifies companies are doing well, and if companies are doing well, default rates are generally low and so that therefore you can take on more [00:16:00] risk and lend money to companies that are maybe not as strong, but they’ll continue to grow and survive and prosper because we have a strong economy.

[00:16:09] And so, one of the things that we actually found in the private side, so this is very important, one of the things we found was a manager who actually recognizes this high correlation. Most of the times you speak to high yield managers, they’ll say like, yeah, they’re bonds, ebb and flow returns go up.

[00:16:28] They go down. Yeah. They’re kind of in line with, you know, what equity markets do. But again, our investors, understanding that, and they take on the risk and they want the coupon and they’ll ride the waves. Well, that’s all well and good, except when, you know, things go really south and you’re making, eight or nine or 10% on the bonds.

[00:16:50] But then one year you have a 25 or 30% downward swing that really eats up returns pretty quickly and if God forbid, you know, you don’t have [00:17:00] those three or four years where you earned eight or nine or 10% and then you go in and the first year you’re in is down 25 or 30%.

[00:17:07] That’s not really very attractive. And so, we found the manager who actually understands that and hedges out some of the equity risk that kind of is contagious, it becomes contagion inside high yield. And it’s kind of a unique strategy that we found. We had introduced to this manager, I think late last

[00:17:27] and it’s somebody who we’ve started to utilize. And I think it’s one of those things that a light bulb went on in someone’s head and said, yeah, someone is actually paying us to do credit. And so, what they care about is that we lend money to a company, we get our dividends and interest back, and then we get our money back.

[00:17:43] And it doesn’t matter what goes on to the rest of the world. And I was like, yeah, you’re right. So, we become big fans of that particular manager. Then you have traditional, what we call asset backed securities. And again, the bank loans are somewhat in the asset back space because they are [00:18:00] secured.

[00:18:00] But by definition, you know, asset backed securities generally are like mortgage-backed securities, whether they be commercial or residential car loans. Okay. There’s an asset there. Aircraft leasing. Hmm. Okay, has become a popular space. Very volatile. One of those things that doesn’t seem too bad until covid strikes and then all of a sudden, planes aren’t flying and no one’s buying new ones becomes a little bit difficult to invest in that space.

[00:18:29] We saw during Covid, we saw some of the pricing of these aircraft leasingvloans that were down 30, 40% during that time. But again, for those who aren’t in that space, creates a great opportunity to buy. So again, timing and under. When to take your risks and where to take them happens to be very, very important.

[00:18:49] We’ve got managers who we would do some, you know, kind of things like a specialty finance. These sometimes are buying up bad debt of companies or they’ll be [00:19:00] buying, you know, bad credit card debt from aggregators and they’ll pay pennies on the dollar. And they’ll just be able to take some time to recoup

[00:19:10] that money, that is outstanding. You know, you’ve got late credit card balances and things of the like, so maybe they’ll buy those at, 20, 30 cents on the dollar and if they collect 40 cents, they’ve doubled the money. Yeah. They made a huge profit. They don’t necessarily, they’re buying it so cheap that they don’t necessarily have to collect

[00:19:28] all the debt that was in this pool of credit card debt. They only need to collect a percentage of it to get a very high rate of return, you know, so there’s kind of a specialty finance. Sometimes you’ll look at, let’s call it like a small business. All right. Again, we’ve talked about this in the earlier private credit podcast where we took the introduction to it is that banks themselves are very finicky and slow to lend

[00:19:56] and it creates a problem. It kind of, you know, puts [00:20:00] sand in the gears of the economy to some extent because deals are out there to be done. Small business owners may want to, you know, maybe take on a project. Small business owners may want to go buy some land. They might want to buy a building.

[00:20:16] They might need some short term and their return on the investment of that short term money is going to be exceptionally strong, but they need it. And they need it now. And so, what they’ll do is they’ll find some of the lenders that we look at, and those lenders will lend them money.

[00:20:32] They’re higher than bank rates. Okay. And we’re not talking about, you know, they’re not the mob. Okay, I don’t want people to think that, but at the end of the day, if you can’t get a loan from the bank because the banks aren’t lending and you want to grow your business, you have to find people who are going to lend you money.

[00:20:52] And so there’s these specialty finance companies that are out there, and yeah, their rates are higher than what the banks are, but similar to what we talked about, [00:21:00] they give you your money and you can go close your deal. And so, if you’re a business owner and you think you can, you know, enhance your business by 30%, does it really matter if you’re paying the bank on a one-year loan, 6%, or you’re paying a private investment firm, 10%.

[00:21:20] I mean, you’re talking about a small delta for a very small period of time for the opportunity to grow your business. And by the way, you know that you can get. And so, we look at, you know, we have managers and funds that we invest in who do that and then there’s also distressed investing

[00:21:36] that sometimes can be, private distressed. Sometimes they’re public distressed, but sometimes those publicly traded distressed debts end up becoming private because they’ll buy up a lot of the debt and they’ll take the company private. You know, there you’re looking at a company that is in dire straits.

[00:21:54] Maybe near bankruptcy and for varying reasons, could be economic, could be, awful [00:22:00] management, could be a whole host of things, could be covid might have created, you know, again, recent issue, global financial crisis. You know, there’s a lot of issues that go on out there that create uncertainty in the markets and do create problems.

[00:22:14] I mean, everything is not rosy all the time. And so distressed investing is basically going out there and buying debt of companies who are in dire straits and taking those companies, turning them around, and then either, you know, reselling the debt or holding onto the debt. Sometimes the debt and the equity kind of go hand in hand.

[00:22:35] Somebody maybe buys both, or maybe sometimes somebody buys the debt knowing that someone’s going to come in and eventually scoop up the company and there’s going to be value there. So, there’s a lot of ways that the distressed environment works. But you know, all these things are predicated on doing great due diligence and having people who understand how to analyze a situation because [00:23:00] unlike Equity, where you can get returns in the 30 to 40% range in a given year, unless you are, you know, at 25% and those are good years.

[00:23:12] Let’s remember the average return is, maybe nine or 10%, but you know the potential when you buy a right to make very, very, very large percentage gains in the equity markets. Bonds, we talked about the returns. There are much. Okay, so when you are taking on additional risk to get an incremental gain, it’s so important to make sure that the due diligence is done well, because since you’re not making dollars, you’re making nickels, dimes, and quarters losing money

[00:23:50] is that much more relevant because if you lose money and you’re not making a lot, it squashes your returns. And [00:24:00] so again, understanding who you’re investing with, what their objectives are, both short-term and long-term, are really one of the most important pieces of investing in private credit.

[00:24:11] So that research is so critical. I totally get that. What about environments, economic environments, they change. You can do all the research you want. Who knew Covid? You didn’t know? No, I did not. And we always, I think we might have talked about this on the first podcast, and my clients, you know, who we clearly talk to regularly know this and every single time

[00:24:35] it’s more relevant for equity markets. But every single time you turn on the news, and we’ve had a few good years of a, you know, a bull market and equity returns have been great, and people are just saying, this is going to cause a problem and this is going to be the problem, and this is the reason why the equity markets are going to go down.

[00:24:54] I’m going to tell you that 9.5 times out of 10 no one [00:25:00] has an absolute clue as to the reason that things are going to go down, and my answer to my clients is very simple. It’s all, and I say the same thing all the time. You’re right, markets are overvalued, but this thing that you’re worried about, not going to be the case

[00:25:16] because we can plan for the things you’re worrying about. It’s the things we don’t know about that are going to create a problem. And in general, that’s that. That’s when you get these really, really, really big, sharp turns, down-turn, turn down. So, you know, you go back to the 2000 timeframes, the.com blow up when all these companies just went belly up.

[00:25:37] Okay. Massive. Global financial crisis, massive problem. Some people saw it coming. Very, very, very few did. No one really understood the magnitude of the effect that it would have on the banks and the financial systems. And you’ve had massive in terms of size, banks potentially going bankrupt.

[00:25:58] Bear Stearns essentially did, they [00:26:00] were bought for pennies on the dollar. Lehman Brothers went bankrupt, you know, causing all sorts of stress. No one predicted that otherwise, you know, you could have planned for it and covid no one predicted it, otherwise you could have planned for it. So, when you have those environments, that’s when you get these massive shocks to the system that you can’t plan for.

[00:26:18] What we’ve seen of is the inflation story. And this is probably one of the times that everybody, a lot of people were talking about it and the writing was on the wall. You just didn’t know what the true effects were going to be as far as the Federal Reserve raising interest rates. I think everybody kind of knew it was going to create a little bit of an issue for the bond market, because bond markets are very efficient.

[00:26:43] Okay? As interest rates go higher, the pricing of bonds go down. It’s very simple. It’s a mathematical equation. It’s not rocket science. Okay. That’s just the reality, how it affects certain parts of the market. You know, certain things will benefit, certain things will be hurting. And [00:27:00] so, but we’ve seen a more traditional recessionary, quote unquote bear market,

[00:27:06] not a massive calamity of collapse. You’ve seen increased volatility in certain months because of expectations being met or not being met. But when you spread out, that’s more of a function of our time in the news flow that everybody has. That, I think, creates that enhanced volatility, not the actual news or inflation itself.

[00:27:30] It’s more. I think it happens more that volatilely happens more because of the expectations that large institutions and traders have. And when those, and you’ve positioned portfolios for one outcome and the other outcome occurs and everybody has to reverse course at the same time, it creates massive movements down in the markets.

[00:27:52] Traditionally those were followed or those had good moves to the upside [00:28:00] in hopes that things were going to be better and then they’re not. So, you get volatility more because of the dynamics of the trading of the world that we live in, not necessarily because of the news itself. And so, when you take a look at, you know, private credit and what are environments are good for it and what environments are bad for it, you traditionally want to have a higher interest

[00:28:22] environment as a base for it because again, you, if you have a higher interest rate environment, you’re getting a greater return for no risk. Okay? Again, not to put a timestamp on today, but the two year treasury is basically 4.25%. It was 20 basis points a year and a half ago. Okay? So, you can give the government money today for two years and earn 4.2%,

[00:28:52] just your risk-free return is attractive. Now, all of a sudden, when you start adding in risk, now you can start getting 7, 8, [00:29:00] 9, 10% from a return standpoint, and now of a sudden you’re being compensated for risk. And so, you always want to be looking at environments, I think, where your base interest rates are a little bit on the higher side.

[00:29:16] Then you also want to have sub level of economic uncertainty. Because certain a level, if you have economic uncertainty, essentially what we call the spread, which is, let’s call it, the yield that you can get in a high yield bond versus a treasury bond. Okay? That’s the spread, that’s the risk premium that you get.

[00:29:40] And when the economic uncertainty exists, your spread is greater. So, you, again, you’re being compensated more relative to a risk-free return. So now we’re in an environment right now where base interest rates are dramatically higher, spreads are higher, and now all of a sudden, you’re being compensated [00:30:00] again for the risk that you are taking.

[00:30:02] And from our standpoint, that’s really the environment that you want to be in, where you’re being compensated for your risk. This way you have the potential to absorb some potential losses here and there, which occur in any investment strategy. But again, you then are looking forward and saying, okay, am I comfortable putting all my money into a credit investment now or do I want to, you know, kind of stage money in and how do I potentially do that?

[00:30:32] Certain funds and we’ll talk about are funds where you put a chunk of money in, so maybe you don’t put all of it in now and you leave something to put in in six months, in a year. Other funds are structured very similar to our private equity funds where they’re capital call structures and we say, okay, over the course of the next two to three or four years, we want to commit X amount of.

[00:30:55] And as they find opportunities, they then go in and buy them. And then [00:31:00] we invest and own those specific investments. And that’s something that’s very attractive now because you’re starting to look at an economy that has a potential recession ahead of itself. And if you have a recession, that’s going to create some chinks in the armor and you’re going to start seeing, you know, better pricing for A.

[00:31:20] Okay, better pricing, meaning higher yields and maybe some lower prices. And so that’s the environment you want to sort of plan for. And so that’s kind of what we’re looking at and seeing. And so those are the good environments for credit, an environment where interest rates are exceptionally low at historic lows, low default rates, credit spreads are tight.

[00:31:40] Yes, you get a better return relative to treasuries. For example. I mean, look, if a 10 year treasury is yielding 20 basis points and you can go buy a high yield bond than it can earn you for sure. That’s an exponential above treasuries, [00:32:00] but you’re taking on risk for a 4% return.

[00:32:03] You could probably get a better return someplace else versus you’re not getting that same exponential rate of return in today’s environment. If you’re getting a 4% and change return on a treasury and you’re going to get 10% on a high yield bond, that’s two and a half times versus, a hundred times, you know, 200 times your return when interest rates were as low as they were.

[00:32:24] So again, understanding the dynamics of the credit markets is very important. It’s a little bit more nuanced than private equity because the credit markets are exceptionally larger than equity markets, but they’re larger and credit markets. Unlike equity markets like we’ve talked about, you know, equity markets.

[00:32:47] We said we can’t fill the Wilshire 5,000 anymore. Right, right. Okay. There’s not even 5,000 publicly traded companies. The fixed income markets have exploded in size. Over the [00:33:00] last 10, 20 years, the amount of debt that is out there is exponentially higher. And so, there’s more opportunities, there’s more creative structures, and that sometimes creates problems because people get cute with how they try to create investments.

[00:33:14] And again, coming back to knowing what you’re buying and making sure you have managers that understand what they’re buying is very important and the risks that are out there. So, it’s very important to have that, again, coming back to the due diligence factor. But credit markets have exploded in size.

[00:33:31] They’re getting bigger and bigger and bigger every single day. And so ,when there’s a, you know, supply demand imbalance creates even more pricing pressure. And I think that’s kind of what we’ve seen in the past 12 months as interest rates have risen, fears of a recession. We’ve seen some pretty poor performance out of the fixed income markets over the course of the past 12 months,

[00:33:53] almost mimicking the returns that we’ve seen of equity markets at some points in time. And that’s traditionally not the case, and [00:34:00] that spooked a lot of people. I think that’s a great place to wrap this one up, Stephen, is there some way that a listener can get in touch with you to continue the conversation.

[00:34:09] Always. Pull up our website, hightowerbethesda.com. You have ways to contact us there. You can listen to the podcast. From there, take a look at some of the other podcasts and blogs that we have out there. Get a good understanding about who we are and what we do. I’ve always said from the beginning, we are different.

[00:34:28] There’s no ifs, ands, or buts about it. Most people out there with financial advisors have no idea what alternative investments are. If they do, they’re probably being done in a liquid fashion, which we’re going to talk about in our next podcast. And they might not understand the pros and the cons of those and why you want to have them, or sometimes why you don’t want to have them.

[00:34:48] So make sure that when you’re accessing the alternative space, you’re doing it with people who know what they are. And of course, you can learn all of this just by listening to Stephen’s podcasts. Okay? So, follow this podcast, [00:35:00] get every episode, get yourself up to date, and of course, share with others. Thanks for being with us.

[00:35:12] Thank you for listening to Approach Investing Differently. Don’t forget to follow the podcast to be notified whenever a new episode is. Hightower Bethesda is a group comprised of investment professionals registered with Hightower Advisors, LLC an SEC, registered Investment advisor. Some investment professionals may also be registered with Hightower Securities, LLC Member FINRA and S I P C.

[00:35:36] Advisory services are offered through Hightower Advisors. LLC Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell Securities. No investment process is free of risk and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable.

[00:35:54] Past performances neither indicative nor a guarantee of future results. The investment opportunities [00:36:00] referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analysis, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice.

[00:36:18] Hightower Bethesda and Hightower Advisors, LLC, or any of its affiliates, make no representations or warranties expressed or implied as to the accuracy or completeness of the information or for statements or errors or omissions. Or results obtained from the use of this information. Hightower Bethesda and Hightower Advisors LLC assume no liability for any action made or taken in reliance on or relating in any way to this information.

[00:36:45] The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only. The opinions expressed herein are solely those of the authors and do not [00:37:00] represent those of Hightower Advisors LLC, or any of its affiliates.

A Detailed Analysis of Private Credit Investing

By Stephen Rosen on March 2, 2023

Learn More About Hightower Bethesda