There is no significant return premium for investors in the booming $1.7tn private credit market once additional risks and fees are taking into account, according to a report by Bloomberg citing a new study by the National Bureau of Economic Research.
In the report, a trio of academics argue that direct lenders on the whole hardly produce any alpha — or extra compensation over broad market benchmarks.
The three economists – Michael Weisbach, Isil Erel and Thomas Flanagan – analysed MSCI data on 532 funds’ cash flows, covering their incoming capital and distributions to investors and comparing the industry’s performance to stock and credit portfolios with similar characteristics, whose fluctuations end up explaining the majority of private-credit returns.
The study makes the case that these private credit funds also carry some equity risk, since around 20% of their investments contain equity-like features such as warrants.
After accounting for those risks, the study found that there is still alpha left on the table, though this vanishes once fees paid to managers are deducted.
Weisbach, a Professor at Ohio State University, said: “It’s not a panacea for investors where they can earn 15% risk-free.
“Once you adjust for the risk, they basically are getting the amount they deserve, but no more.”
