Why more family offices are moving into private credit
As family offices shift their portfolios from the public markets into private assets, one of the most attractive asset classes has become private credit. In 2021, family offices surveyed by UBS kept only about 2% of their assets in private debt offerings, but 27% plan to invest in them in the next five years.
Overall, private credit is one of the fastest-growing asset classes, rising 13.5% per year on average over the past decade, with assets under management spiking to $1.2 trillion at the end of 2021, according to Preqin. Much of that is due to traditional lenders tightening their requirements and financing terms, while corporate borrowers face pressure to raise money during the correction in valuations throughout this year.
In the recent North American Family Office Report by Campden Wealth and RBC, 34% of respondents said they planned to increase their allocation to private debt and direct lending in 2023.
But the report included a cautionary note, with the managing partner of a single-family office in Connecticut predicting that there could be “forthcoming trouble in the private debt market … because there’s just so much money out there. And it’s not regulated, it’s not inside the banks; banks don’t make risky loans anymore.”
- More family offices are moving into private credit. In 2021, only 2% kept their assets in private debt offerings, but 27% plan to invest in that asset class in the next five years.
- Private credit is one of the fastest-growing asset classes, rising 13.5% on average per year over the past decade.
- In general, there are three types of private credit: leverage-buyout financing, trade finance loans and corporate lending to small and midsize companies.
Still, such loans are making money for family offices. At Isola Capital, a family-office asset management platform, a private credit vehicle created for its clients to invest in Singapore has produced targeted net annual returns of 10% to 12%, said CEO Anthony Chan.
And Trish Halper, an investment executive in the global family-office unit at Northern Trust Corp., said she has seen “an increase in credit positions.” Typically, family offices get into credit positions by using funds rather than making their own direct loans or trading directly in the secondary markets.
In general, private credit consists of three varieties:
- Leveraged-buyout financing, which has spiked in recent years.
- Trade finance loans, which involve borrowers offering receivables or working capital in exchange.
- Corporate lending, usually to small and midsize companies, which have a harder time getting loans from banks in the wake of stricter international regulations.