As interest rates remain higher for longer, borrowers are increasingly turning to an alternative source of funding: private credit. These arrangements benefit both sides of the transaction; lenders receive higher returns than traditional loans, and their clients get a source of financing with the flexibility to meet their unique needs.

With alternative asset managers packaging their private credit investments to accommodate smaller account sizes, this asset class is showing up more in investors' portfolios.

This product proliferation gives investors key advantages that are hard to find elsewhere. Private credit typically has a low correlation to stocks and bonds, which are often the mainstay of an investor's portfolio. It also provides an opportunity for higher returns than more traditional debt instruments.

Private credit's advantages, diversification and higher returns, come at a cost. These funds can be less liquid than traditional investments, and the return, as with most investments, is not guaranteed.

However, private credit may be an asset class to consider for investors with a time horizon that allows them to put a portion of their account in less liquid investments and who desire a chance at higher returns.

Finsum: Read how private credit offers investors the opportunity for greater diversification and higher returns than more traditional forms of debt investments.

Diamond Consultants recently completed the 2023 version of its Advisor Transition Report to identify the most important trends in financial advisor recruiting. Overall, recruiting was up 7.5% compared to 2022 which was unexpected given several headwinds. Many advisors who switched reported being more focused on the long-term to find the best place to maximize the value of their practice on a 5 to 20 year horizon.

Another interesting finding is that each channel seems to have a big winner. LPL enjoyed the most success from independent firms, while Morgan Stanley was the winner from traditional wirehouses. Boutique and regional firms like Rockefeller, RBC, or Raymond James also notched some major wins as they offer many of the resources of the large wirehouses without the bureaucracy. 

One catalyst for the increase in recruiting activity has been the expected involvement of private equity bidders. Yet, this hasn’t materialized in terms of PE-backed RIAs poaching talent from legacy players. One factor is that PE offers come with some caveats that make it less appealing to advisors. 

Finally, the lure of the independent channel seems to be fading despite the number of options increasing. This is likely due to traditional firms offering more generous compensation packages while the initial cohort of recruitees who wanted an independent channel have already moved firms. 

Finsum: Diamond Consultants put together its 2023 report on advisor transitions. Major takeaways are that recruiting remained strong despite some major headwinds and that PE buyers haven’t been successful in luring advisors. 

In 2023, private credit funds managed $550 billion in assets and generated 12% in average returns for investors. Private credit has been ascendant the last couple of years and helped private equity firms find a new source of revenue. 

As public market financing become less available, direct lenders extended credit to small businesses and buyout deals, replacing syndicated loans and the high yield bond market. It resulted in private credit growing from less than $100 billion in 2013 to its current size.

This year, investment banks are once again stepping into the fray. So far, $8.3 billion of private market debt has been refinanced via syndicated loans, indicating that the high yield bond market in the US is once again a viable option for companies. In leveraged buyouts, banks are also competing as evidenced by JPMorgan’s financing of KKR’s purchase of Cotiviti, a healthcare tech company.

Spreads for syndicated loans and high yield bonds have dropped to thier lowest levles in 3 years. Rates are now between 200 and 300 basis points below what private credit lenders were offering in December. 

Private equity firms are expected to pivot into higher quality, asset-backed financing such as credit card debt and accounts receivables to replace revenue from private credit. They would also benefit from an improvement in public market sentiment and liquidity as they are sitting on a backlog of unsold investments in portfolio companies. 

Finsum: The private credit market has boomed over the last couple of years due to anemic public markets and hesitant banks. Now, banks are once again competing for business and offering more favorable terms.