Three characteristics to look for when investing in semiliquid private credit strategies

When considering a semiliquid strategy to invest in, we suggest taking the following three attributes into account:

1) Multiple sources of yield and return

The range of semiliquid strategies has grown significantly in recent years, yet most remain focused on a single sector – corporate lending. Within private credit, the opportunity set is much broader than the many middle market direct lending strategies suggest. A strategy that can invest flexibly across the broad spectrum of private credit allows an asset manager to invest only in what they see as the best opportunities, while potentially enhancing portfolio diversification.

2) A well-structured “liquidity bucket”

Because these strategies invest in private and typically less liquid assets, it’s important to ensure that the liquidity being offered is reliable and focused in higher quality assets. Typically, managers achieve more frequent liquidity by allocating part of the asset mix to more liquid traded securities or a “liquidity sleeve.” But investors should ask, Is this allocation sufficient to give investors liquidity when they need it most? Do the securities offer an attractive yield without introducing additional volatility? We believe a well-designed liquidity structure is just as important as the sourcing of attractive private investments.

3) Sustainable distribution yields

Lofty distribution yields that are greater than or similar to total return targets or yields-to-maturity can be a red flag. With the addition of fees, a default or two in a portfolio could potentially lead investors down a path of net asset value (NAV) decline. More conservative distribution yields can potentially withstand periods of stress should they emerge and set investors up for more stable and stronger long-term gains.

The global macro environment remains anything but normal, and investors will have to navigate a volatile and challenging path over the next few years. As we enter an environment of higher interest rates, uneven growth and uncertain inflation, traditional capital market returns are likely to become lower and more volatile.

We believe a dynamic, multi-sector approach to semiliquid private credit that is designed to be resilient and seeks to provide consistent income could play an important structural role in many investors’ portfolios.

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