Fundraiser: “We crushed our last fund. Time to re-up?”
Pension fund: “We’re shifting allocation.”
Fundraiser: “Wait--since when?”
Pension fund: “Consultants are saying private credit.”
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Investor: "I'm worried about a stock market crash."
Money manager: "How about moving 20% into real estate?"
Investor: "Isn't it hard to access?"
Money manager: "The big PE shops now have vehicles for private investors."
Investor: "Not sure I want to take more equity risk right now."
Money manager: "How about equity like returns in private credit?"
Investor: “...without equity risk?”
Money manager: “Exactly.”
Investor: “Go on...”
---- The private credit pitch ----
Private credit is all the rage.
Capital is flooding in fast as Ares, Blackstone, KKR, Oaktree, Apollo, etc. are raising billions and reshaping the space.
Lots of FOMO energy.
Their argument, as exemplified in this piece by Ares, generally hits the following points...
1. Filling the lending gap:
Traditional banks have pulled back from real estate lending due to regulations and risk concerns, creating opportunities for private lenders.
2. Higher yields:
Private real estate loans often offer higher returns than traditional fixed income because of illiquidity and complexity premiums.
3. Flexible loan structures:
Private lenders can customize terms, unlike banks that follow rigid underwriting guidelines.
4. Collateral-backed security:
Loans are secured by real estate assets, providing downside protection.
5. Floating rate advantage:
Many private real estate loans have floating rates, offering a hedge against rising interest rates.
6. Diversification benefits:
Private real estate credit has low correlation with equities and public bonds, improving portfolio resilience.
7. Faster execution:
Private lenders can close deals more quickly than banks, making them attractive to borrowers needing certainty of execution.
8. Distressed and special situations:
Private credit can capitalize on market dislocations, offering capital when traditional lenders retreat.
9. Growing market:
Institutional investors are increasing allocations to private real estate debt as a core fixed-income replacement.
---- Your take? ----
Private credit: the next big thing or a bubble in the making?
How will this play out over the next few years?
A. Private credit is worth the hype.
B. Defaults will hurt returns more than expected.
C. Abundant flows will compress spreads, hurting yields.
D. Asset/liability mismatches will lead to mortgage REIT-like problems.
Read the full report - A Comprehensive Guide to Private Credit.
PS – Real estate capital isn’t one-size-fits-all. Understanding what drives the nine major capital providers is critical, which is why we kick off every FastTrack course with a deep dive into real estate capital markets. Sound interesting? DM us to explore our next cohort.
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