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In the current market environment with few reliable sources of return, many investors are turning to private markets to supplement their investments in public markets. Altera believes that within this space, smaller opportunities present the greatest potential upside for investors.

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Predicting the future in financial markets is like trying to pick the winner of the Super Bowl in the preseason, unless maybe you have a copy of Gray’s Sports Almanac from Back to the Future. Surely, the confluence of issues relating to global supply chains, COVID-19, monetary policy, and fiscal stimulus, along with the current geopolitical landscape have stirred capital markets. With that, market participants have cause for concern across many things, especially inflation, overheating equity valuations, and the looming possibility of a recession.

With no shortage of issues to navigate, there are two questions that remain top of mind for investors:

  • Where can opportunities with favorable expected risk-adjusted return profiles be found?
  • Are there options that provide a yield and preserve the purchasing power of financial assets?

While answers to these questions have a dependency on point in time and relative market fundamentals, as it turns out, we feel private credit investments are well positioned to deliver both strong risk-adjusted returns and a meaningful yield.

Fundamentally, private credit is a form of fixed income, but in many ways it’s markedly different from public fixed income. Even before interest rates began their current upward mobility (the 10-year treasury is approaching 3.00% for the 3rd time in the last 10 years1) and the effects of inflation began to reverberate through consumer wallets and corporate coffers, the case for private credit was strong. Now it is even stronger.

Private credit is typically structured as floating rate debt (generally in the form of loans) and very often includes extensive protective covenants for lenders, which present key advantages to investors. As highlighted in Altera’s recent perspective “IS PRIVATE CREDIT THE ANTIDOTE FOR WHAT AILS FIXED INCOME?, private credit can deliver both yield and capital preservation. Effectively, investors are getting the benefit of a more favorable interest rate profile relative to higher-quality, fixed-rate public debt, and a more favorable risk profile relative to floating rate public debt.

These differences were two of the primary drivers behind Altera’s launching of a private credit offering in the current market environment. Further, we selected a sponsor with an extensive track record, experienced team, and thorough investment process. This sponsor is conservative in how they underwrite the businesses they lend to, has the ability to structure loans to provide attractive income with capital preservation, and also adds the possibility of capital appreciation through equity in their investments.

On a risk-adjusted basis, we believe private credit is poised to perform well relative to other assets beyond just fixed income. The combination of structured yield, downside protection, and ability to capitalize on equity upside makes for an “all-weather” strategy. We continue to operate without a crystal ball to predict the future, but we also see the role of private credit in investment portfolios becoming more and more of a benefit. I wonder what Marty McFly is seeing in the Almanac…


[1] Board of Governors of the Federal Reserve System (US); www.fred.stlouisfed.org/series/DGS10.