Private Credit Managers Face New Scrutiny Risks
In the face of recent concerns about private credit (including JPMorgan Chase CEO Jamie Dimon warning of “cockroaches” in response to two recent blowups) and longstanding questions about private real estate valuations, advisors and asset managers pointed to strong fundamentals and tailwinds and the importance of underwriting, manager quality and asset selection as essential bulwarks when using the assets in client portfolios.
The comments came as part of panel discussions during the inaugural RIA Edge Private Markets conference on Thursday in New York City.
“Really great managers are diversified, have great underwriting skills and the best ones also have workout teams,” said Michael Tiedemann, CEO of AlTi Tiedemann Global. “When there are issues, they have resources.
“There are always going to be fraud and credit-related issues,” he added. “There are always factors that can lead to bad behavior or businesses coming under stress.”
However, Tiedemann pointed to the overall low levels of defaults and delinquencies in private credit, while also arguing that there were no warning signs of a larger credit event.
“Credit cycles historically have been linked to banks,” he said. “The asset bases in banks can go away quickly, as we’ve seen. And leverage in 2008 almost took down everything. … On the private credit side, asset matching is better than any bank.”
Tiedemann added that a new opportunity might arise with the emergence of a secondary market for evergreen funds, including interval funds focused on private credit. Interval funds typically gate redemptions at 1% per month and 5% per quarter, but secondary markets would give investors another option for liquidating positions.
“Being on the other side and being able to acquire high-quality managers at an 8% to 15% discount will give you an advantage,” he said.
Selecting private credit managers with those types of competencies is a way to reduce risk. In addition, keeping an eye on whether managers are becoming aggressive with loan terms and increasing leverage is another factor for advisors when vetting opportunities.
“When we use private credit, we keep it diversified,” said Monish Verma, founding partner and CEO of Vardhan Wealth Management, an independent RIA based in Farmington Hills, Mich. “We won’t look at anything with leverage creep. … Our due diligence process allows us to look pretty deep and efficiently.”
Verma added that private debt is usually a “first look” for the firm when considering adding private markets to a client’s portfolio. For suitable clients, the RIA scales allocations up to 15% to 25%, with about one-fourth of that allocation allocated to private credit.
Other factors that play a role include broader financial planning goals, such as seeking downside protection, income, growth or other objectives.
On the real estate side, Nick Meyer, executive vice president, capital markets, BAM Capital, and Ben Paolone, executive vice president, investments and capital markets, Becknell Industrial, outlined their respective firms’ niches and how they could fit for investors. BAM Capital focuses on multifamily real estate in Midwestern markets, while Becknell Industrial is a specialist in warehouses and logistics.
“There is a fundamental dynamic in the U.S. that we always need more housing, it’s just a question of where,” Meyer said.
For example, in markets like Austin, Texas, developers overbuilt units and, as a result, rents have been declining year-on-year. But real estate firms have built fewer apartments in the Midwestern markets. In addition, dynamics in the single-family home ownership market have pushed the average age of first-time buyers into their 40s. Instead, many Americans are remaining renters for longer.
As with private credit, Dmitriy Katsnelson, deputy chief investment officer with Wealthspire Advisors, stressed the importance of due diligence when vetting potential real estate opportunities.
“You have to spend time on the details,” Katsnelson said. For example, working with real estate firms (either locally or nationally) that are vertically integrated and have the capacity to fully manage assets is important. Track record and concentration are other factors.
“We saw an Opportunity Zone fund that was a single property. That’s not something we would do,” he said.
“Also people pushing the envelope on leverage,” is a red flag, he added.
Paolone echoed the importance of sponsorship quality.
“Do they have a proven track record and strong governance? Do they have deep customer relationships? These are all important,” he said. “You also have to look at underwriting and the demand drivers of specific asset classes.”
BAM’s focus on industrial, for example, is based on tailwinds driving demand in the space, including the continued growth of e-commerce and potential growth in manufacturing in the United States.
Lastly, Katsnelson had some words of caution in response to the ever-growing roster of asset managers eying the wealth channel.
“Good luck to everyone getting into the RIA world,” he said. “We are pain in the butt to deal with. … My recommendation is to get in good with the custodians. … If you can say, ‘We are on this platform and we have these specific solutions you can roll into,’ … that will pique interest.”