According to a survey of more than 50 independent financial advisors conducted by alternative investment platform Crystal Capital Partners, there is a growing demand for private credit strategies among financial advisors, with a majority of respondents looking to reallocate some portion of their existing public fixed-income exposure to private credit, particularly direct lending, to take advantage of better risk-adjusted return expectations, diversification benefits and the potential for higher yields.
More than 20% of advisors said they had “significant” exposure to private credit within their client portfolios, while more than 45% said they had “minimal” exposure. Almost 30% said they had no exposure, and more than 60% said they were looking to increase exposure to private credit this year.
Of those who said they were looking to increase their exposure to private credit, more than 35% said they are allocating with new money, while more than 5% said they are reallocating from other alternative asset classes (e.g., private equity or hedge funds). In addition, 35% said they were currently planning to reallocate up to 10% of their clients’ portfolios from public fixed income to private credit, more than 15% said they were looking to reallocate up to 25% from public fixed income, and under 5% said they were looking to reallocate 50% or more from public fixed income.
Of those who said they were not looking to increase their exposure to private credit, almost 70% said it was due to perceived higher risk, more than 45% said it was due to client preferences, and almost 40% said it was due to lack of familiarity with private credit. Others said they were not looking to increase their exposure due to sufficient performance of public fixed income (more than 15% of respondents) and the economic/market outlook favoring public fixed income over private credit (more than 5%).
Of those already invested in private credit, more than 45% said they will invest the same amount in new vintages, more than 25% said they would invest but with less capital, almost 10% said they will invest more, and more than 15% said they will not invest in new vintages.
When asked which factors influence their decision to include private credit strategies in their investment allocations, the three most common answers respondents provided were high yield potential (80%), better risk-adjusted returns (80%) and diversification benefits (more than 70%). Other answers included long-term investment horizons (i.e., illiquidity was not a concern) (almost 30%), inflation hedge (25%) and client demand (20%).
The specific types of private credit that advisors find particularly appealing are direct lending (50%), real estate debt (more than 25%), and mezzanine debt and special situations (both more than 20%). Other answers included distressed debt (almost 20%), infrastructure debt (almost 15%), and venture debt (5%). More than 40% of respondents said they had no preference.
“Private credit has been the most popular private markets strategy on our platform by far over the past year, and we saw a 30.52% year-on-year growth to December 2023 in allocations,” Steven Brod, senior partner, CEO and chief investment officer of Crystal Capital Partners, said. “The strategy has exploded in popularity as a traditional fixed-income replacement and alternative source of funding. We anticipate continued high demand as financial advisors benefit from variable rate term sheets and address interest rate risk in their portfolios.”
