Is Private Credit a Popularity Contest? | AWM Insights #248

Key Takeaways:

• Thoughtful portfolio construction and private market structuring are non-negotiable, especially when matching illiquid investments with your overall financial game plan

• Interval funds promise easy access to private markets, but they're like movie theaters with tiny exits—when everyone rushes out at once, you get a stampede

• After-tax returns tell the real story: that attractive 10% yield might only net you 5% after the federal government takes its cut in the highest tax bracket

• If it sounds too good to be true, it probably is. You can't wave a magic wand and make long-term, illiquid investments suddenly liquid without trade-offs

The Rise of Private Credit

Private credit emerged from necessity after the 2008 financial crisis. Bank regulations created a void for middle-market businesses seeking capital, while investors dissatisfied with 1-2% bond yields searched for higher returns. This marriage between supply and demand birthed an industry that's ballooned from institutional-only to retail-accessible investments.

The pitch sounds compelling: earn close to 10% while supporting businesses that need capital. But accessing private markets by hitting the easy button rarely works out.

The Structural Mismatch Problem

Here's where things get complicated. Investment managers created interval funds to democratize private credit, packaging illiquid, long-term loans into vehicles promising regular redemptions. Think of it as a movie theater where you can supposedly come and go as you please—except there's only one tiny exit.

When three borrowers went under recently, representing a tiny fraction of the market, it triggered a stampede. Retail investors rushed for the exits simultaneously, exposing the fundamental flaw: you can't genuinely make something illiquid suddenly liquid without consequences.

The Tax Efficiency Reality

Professional athletes in the highest tax brackets face a sobering math problem. That 10% yield you were promised? Half disappears to federal taxes, leaving you with 5%. You're essentially making a great investment for the government, not yourself. This tax inefficiency is precisely why we've generally avoided private credit for our clients. After-tax returns matter when you're building generational wealth.

Doing the Work That Matters

Private markets are complicated, period. There's no shortcut. We meet thousands of potential managers and founders annually to identify what's truly best-in-class versus average or just a bright shiny object from a big-name manager.

Democratization of alternatives sounds appealing, but investment managers are pushing it because they see profit, not because the structure serves you. The hard truth: accessing private markets requires doing the hard work, understanding what you're actually investing in, and structuring your portfolio to handle illiquidity.

Building Your Game Plan

Your portfolio needs to be built for the illiquidity that comes with private markets. You can't have your cake and eat it too. Demanding liquid access to illiquid investments means giving up expected returns or exposing yourself to the bad behavior of panicked investors around you.

This isn't to say private credit lacks merit. There's genuine societal need, and accessing it properly can generate solid returns. But the structure matters enormously. The right approach considers your tax rate, aligns with your overall financial strategy, and accepts the trade-offs inherent in private market investing.

Your Championship Legacy

When you hear someone yell fire in a crowded theater—even if it's just someone lighting a lighter—you still get the stampede. That's what happened in private credit markets, and it's a powerful reminder that structuring, due diligence, and tax efficiency aren't optional considerations. They're fundamental to protecting and growing your wealth across generations.