A stability play in fixed income

“In the public fixed income domain, a lot of the volatility is being driven more by macro and rate changes versus in private credit, it just tends to be a more calm space. And I think this tends to be one of the big draws beyond just absolute performance that investors appreciate about the asset class,” Perry says. “Part of the calmness, if you will, has to do with the cadence of valuation. And in more of the public fixed income domain, you see that daily value versus in private credit, it tends to be monthly or quarterly depending on the vehicle structure. And so that in and of itself creates an element of stability. I think the second piece is structural.”

Structural stabilizers in private credit

Perry argues that the mid-market deals that Hamilton Lane tends to focus on are key to that structural stability. He notes that in middle-market private credit, equity contributions as a percent of total capitalization is near historic highs. That points to more structural stability in these firms as borrowers. Perry adds that in his firm’s own deals, they include at least one financial maintenance covenant. As well, these deals have a floating rate, which can benefit when rates reverse course, and tend to come with duration benefits over long-dated government debt.

Perry acknowledges that private credit has seen some of its own recent challenges in the headlines with funds lending to software as a service (SaaS) companies pressured by AI disruption narratives. He says, though, that this wobble was more tied to investor confidence than underlying market fundamentals. He says that the broader default rate has stayed slow. Borrowing companies have largely benefitted from the continued expansion of US GDP, he says.

Perry also says that private credit can provide insulation against the growing presence of AI-related debt in public credit markets. Most AI-related debt issued by the hyperscalers has been at the investment grade level. Private credit, Perry says, tends to operate at credit ratings below investment grade, where far less AI-related debt has been issued. For investors and advisors concerned about how much of their equity and fixed income portfolios have been exposed to AI, this could be a valuable feature.

Using private credit for retail clients

Private credit has long been the domain of institutions, rather than retail investors, in part for the same reason its performance tends to appear so stable. Infrequent pricing means low liquidity which doesn’t suit an investor with a shorter time horizon. Perry says that’s changing, however, with evergreen and semi-liquid structures replacing the old model of a closed-end fund. Minimum investment amounts are now lower, too. Hamilton Lane’s own US-based Credit Income Fund has a minimum investment of $2,500 (USD), allowing investors and advisors to dip a toe into the space and see how it impacts their portfolio performance and their investment behaviour.