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Combatting Inflation with Private Credit Funds

By: Logan Henderson | Published: 12/16/2022
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Est. Reading Time:
3 minutes

“Now is the time to rethink approaches to asset allocation, including re-underwriting one’s traditional fixed income allocation, to add meaningful return and diversification in a world where there is potential for a higher ‘resting heart rate’ for inflation.” - Kohlberg Kravis Roberts & Co.

As banks start to pull back from traditional lending, an opportunity arises for private credit funds to fill the gap in the market with better terms and a higher yield, all while sitting higher up in the capital structure.

For investors, you can look to private credit as a more inflation-resilient asset class. Replacing a portion of the income-generating sleeve of your portfolio with private credit offers the potential for diversification and attractive risk-adjusted returns; KKR’s loss-adjusted expected returns for private credit range from 11% to 15%.

As in private equity, manager selection remains one of the biggest drivers of returns in private credit. When we evaluate potential fund managers for the Gridline platform, we look closely at their track record and existing portfolio to ensure that they are consistently underwriting opportunities in which borrowers are well positioned to meet interest obligations even under uncertain macroeconomic conditions.

Some private credit funds also take a hybrid approach, enhancing their returns by taking small equity positions in the companies they lend to. Investing in these hybrid funds allows investors to supplement returns on the ledger's fixed-income side while mitigating risk and generating predictable cash flow. 

An excellent example of a fund utilizing this hybrid approach is VSS Credit Partners, which was recently available on our platform. VSS’s three previous funds ranked #1 in the Preqin Mezzanine category by Net IRR. As a hybrid private equity firm, it ranked in the top quartile for both the buyout and all private equity categories by Net IRR.

-Logan Henderson, Founder and CEO

Worth a Read

How Private Investors are Shifting Tactics in the Face of a Downturn

A recession is a challenge that private investors are well-equipped to handle. There is value to be found in active managers who can adapt their strategies to current market conditions. Read more.

How Portfolio Companies Adapt in a Recession

Active fund managers can position themselves to capitalize on companies that shift tactics during a downturn and to help their portfolio companies outperform the competition. Read more.

A Final Thought

Earlier this month, the Blackstone Real Estate Income Trust Inc., more commonly known as BREIT, halted withdrawals as October redemption requests exceeded its monthly limit of 2% of net asset value and quarterly threshold of 5%.

The product has been one of Blackstone’s most significant growth drivers in recent years by targeting retail investors that are not large enough to invest in its traditional funds. And the fund has performed well, returning 13.1% annually since its inception six years ago.

As with other products, such as interval funds, often touted as a liquid alternative to traditional private asset funds, you must understand the limitations around redemptions and accessing liquidity.

Investing in these products is not the same as investing in public equities, even if they are often compared to one another. Gridline aims to provide transparency and clarity around investment risks, fees, and liquidity while eliminating the incentives brokers might get to push certain products.

Let us know what you think - please don’t hesitate to reach out.

-The Team at Gridline

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