Private Credit
Private credit’s growth and returns have made it a key asset class. However, transparency concerns, especially in loan valuation and return volatility.
Credit Challenges
and Opportunities
The private credit market has witnessed tremendous growth over the last two decades, expanding from a modest $50 billion to a substantial $1.7 trillion. This expansion has been accompanied by impressive performance, with private credit strategies consistently delivering higher gross returns and lower volatility than both the S&P 500 and the MSCI World Total Return indices during the same period.
by Private Credit
Despite its rapid growth, the private credit market remains largely opaque to investors. Due to the lack of active trading, asset valuations are often based on asset managers’ modeling assumptions. Private credit funds report performance infrequently and use metrics such as IRR, which can obscure the true risks taken. These metrics focus on returns but don’t fully capture the risk or volatility involved, leading to potential misconceptions. Critics derisively refer to this as “marking to magic” where valuations rely more on assumptions than observable market prices.
To illustrate these challenges, Pluralsight’s term loan marks reported by business development companies (“BDCs”) showed wide variations. At year-end 2023, these marks ranged from 89-99% (fair value over par). This divergence widened to 14 percentage points in March 2024. By June 2024, as Pluralsight approached restructuring, the marks plummeted to 46-50 cents on the dollar. This significant disparity highlights the inherent challenges in accurately pricing these illiquid instruments. The 44% drop in the average marks between March and June 2024 further underscores the limitations of quarterly reporting, as the decline likely occurred well before the reporting date. Investors, typically only privy to quarterly marks, may face challenges in assessing their investment risks in a timely manner.
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and Implementation Services
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Private credit’s appeal lies in its potential to offer attractive risk-adjusted returns. However, skepticism remains on whether this performance is a result of infrequent and delayed valuations or genuinely low volatility of this asset class. Fund managers who adopt independent and regular verification of asset prices
can gain a strategic advantage by enhancing trust with investors. By ensuring transparency and timely verification, managers reduce perceived risks and build the trust needed to attract more capital. Increased transparency will be key to driving sustainable growth within the private credit market.