Why complement direct lending with real estate debt?

Private credit, encompassing both real estate debt and direct lending, is currently experiencing significant tailwinds, making it an attractive option for investors. These assets offer structural benefits by providing possible opportunities to diversify income exposure away from traditional asset classes, all while potentially maintaining historically low levels of losses. Additionally, corporate and asset-backed private credit can complement a portfolio aimed at optimizing risk, return, and yield, which may help enhancing overall portfolio performance. Here are some to consider.

Current Market Environment:

• Elevated interest rates and inflation have created attractive yields for private credit.
• Regulatory changes have reduced traditional bank lending, increasing potential opportunities for non-traditional lenders.

Structural Benefits:

• Private credit may provide high returns, low correlations, and low loss rates.
• The illiquidity premium can offer 300-400 basis points over public assets.

Market Size and Growth:

• The commercial real estate debt market is significant and growing, with a large opportunity set for alternative lenders.
• CRE debt fund AUM has grown 380% over the past 15 years.

Portfolio Optimization:

• Adding private credit to traditional portfolios can improve returns and reduce risk.
• Private credit has consistently outperformed public counterparts due to unique opportunities and diligent underwriting.

There is a distinct potential of private credit to enhance income portfolios through diversification, high returns, and structural advantages in today’s market. Read the complete analysis in “Enhancing income portfolios with private markets - complementing direct lending with real estate debt.”