We’ve been allocating to private credit for close to five years now. You may or may not have seen the recent headlines: fund gates, redemption freezes, predictions about the “next shoe to drop.” If you haven’t, that’s ok. Not needing to pay attention is a reason successful families choose a financial advisor. But it has been in the Wall Street Journal, it’s been on Bloomberg, and it’s worth a conversation. Not because I’m worried, but because you deserve to know how I’m thinking about it.

First, let’s talk about the scoreboard. Over the last five years, our private credit allocation has earned roughly 9-10% annually. Compounded, that’s somewhere in the neighborhood of 55-60% on your money. Over that same stretch, the most common public bond index (the one most advisors use as their core bond holding) returned less than 1%. Total. Over five years.

That’s not a typo. A dollar in private credit grew to about a dollar fifty-seven. A dollar in the standard bond index grew to about a dollar and one cent.

Why such a big gap? Because when you invest in credit, you’re choosing where to take your risk. There are really only two options.

The first is interest rate risk. That’s what traditional bonds carry. Most people look at investment-grade bonds and think “safe,” and they’re right about one thing: the chance of the borrower defaulting is very low. But those bonds are extremely sensitive to interest rate moves. When the Fed raised rates aggressively, bond prices got crushed. That’s not a credit problem. Nobody defaulted. It’s a math problem: when new bonds pay more, the old ones are worth less. That’s what happened, and it’s why the standard bond index earned almost nothing over five years.

The second is credit risk. That’s what private credit carries. The interest rates on these loans float, so when the Fed raised rates, the income went up instead of the price going down. The risk you’re taking is that the companies you lent money to might not pay you back. If you believe the economy is functioning and the borrowers are solid, that’s a risk worth taking, and you’re getting paid well to take it.

We chose credit risk. That was a deliberate decision, and one we’ve talked through together. Were we right? Yes. With any successful investment, there’s some skill and some luck involved. But a 55-60% cumulative return versus essentially zero is a gap that’s hard to explain away. We’ll take the win.

The question now is: what’s the right call going forward? Let me walk you through our options.

Door One: Get out.

The case for leaving isn’t unreasonable. Yields have come down from north of 11% a couple years ago to around 8.5% today. The easy stretch, where you were getting paid generously just for showing up, that chapter is closing. There are also some real pressures building under the surface: more borrowers deferring their interest payments instead of paying cash, more quiet restructurings, and a batch of loans made in 2021 when lending standards were looser than they should’ve been. Some of those are starting to show their age.

If you believe things are going to get meaningfully worse, stepping aside has some logic to it.

But here’s the question you should ask: get out and go where?

Your money doesn’t get to sit on the bench. It has to go play somewhere else, and right now, the alternatives have problems of their own.

High yield bonds are paying around 6%, which is about 2% above Treasuries, close to the thinnest premium in decades. For that, you’re taking something close to stock-market-level risk with full daily price swings. Leveraged loan defaults are actually running higher than private credit defaults. Investment-grade bonds get you around 5%, but a single bad month of interest rate moves can wipe out a year of income.

So before you walk through door one, you need an honest answer to a simple question: what are you replacing it with that increases the chance of your achieving your goals? In my experience, most people pushing the “sell everything” narrative haven’t thought that part through.

Door Two: Stay put.

This is where I want to slow down, because there’s something buried in all the noise that changes everything once you see it.

Most of what’s in the headlines right now is about how the funds are built, not whether the actual loans are going bad. That is the single most important distinction in this entire conversation.

Here’s an example. Earlier this year, a well-known private credit fund froze redemptions and it made national news. The story that ran was “private credit is blowing up.” But when you look at what actually happened, the loans underneath that fund were fine. The portfolio was later sold for 99.7 cents on the dollar. The borrowers kept paying. The issue was that the fund’s withdrawal process couldn’t keep up with the number of people trying to get out at the same time.

Those are two very different problems. One is a design flaw in how a particular fund handles withdrawals. The other would be the companies you lent money to going out of business. The first one is fixable. The second one would be serious. What we’re seeing right now is almost entirely the first one.

And when you pull back and look at the long-term data, the picture gets even clearer. The broadest benchmark for private credit covers 20 years of lending history:

- Average annual credit losses: about 1%

- Worst single year (2009): roughly 7% in losses

- Only negative total return year: 2008, at -6.5%

- The very next year? A +13.2% rebound

- If you held through both years (the worst stretch in modern credit history) your cumulative return was still positive at roughly +5.8%

The worst two-year period this asset class has ever seen still made money for the person who didn’t flinch. Compare that to public bonds, which lost more than 13% in 2022 alone and are barely back to even five years later. Could it be worse moving forward, of course. The future is unknown so it’s up to us to make the best decisions with the information we have.

Staying put makes sense when the credit quality in your specific holdings is solid, the manager is still lending responsibly, and the yield justifies the trade-offs. We’re monitoring all three for you. That’s our job. Right now, across what you own, those boxes are checked.

Door Three: Add to the position.

This is the contrarian move, and I know it sounds strange when the headlines are this negative. But there’s math behind it.

Here’s something most people don’t realize: many of the same private credit portfolios you can invest in through a private fund also have a publicly traded version. Same manager. Same loans. Same credit team making the same lending decisions. The only difference is the wrapper. One trades on the stock exchange, the other doesn’t.

When headlines get ugly and fear takes over, the publicly traded versions get marked down by the market, even though the loans underneath haven’t changed. Right now, some of these are trading at double-digit discounts relative to their private fund counterpart.

That’s the opportunity. You’re buying the same exposure (the same loans, the same income stream) at a discount, simply because the publicly traded price reflects the market’s mood, not the credit quality of the portfolio.

If the stress is temporary and the underlying credit is sound (and the data so far says it is) you’re collecting double-digit income while you wait for the discount to close. When the fear passes and the price catches up to reality, you’ve captured both the income and the appreciation.

The risk with this door is honest and simple: if this turns out to be the beginning of a real credit downturn, you bought more of something that’s going to get cheaper before it gets better. That’s why you size it right and don’t overcommit. The opportunity is real, but it comes with a potentially bumpy ride.

So which door?

All three can work. I mean that. But if you’re not losing sleep over this, and you’re not looking to increase your risk in exchange for more return, staying put is a good place to be. The credit quality is solid, the income is still coming in, and the headlines are telling a scarier story than the data supports. The risk I’m watching most closely isn’t a meltdown. It’s the slow compression of yields over time, and that’s a reason to be selective going forward, not a reason to react right now.

We’ve done the work on what you own. We see what’s happening. And if any of this changes in a way that moves the needle, you’ll hear from me, not from a headline.

If you have any questions, give me a call.