Investors Should Avoid Public Credit: Cliffwater

Investors should avoid public credit in favor of private credit to maximize their returns. Cliffwater, an alternative investment advisor and fund manager, studied public credit benchmarks as well as private credit model portfolios using its own indices between June 2013 and June 2024.

The Cliffwater Unlevered, Net-of-Fee Direct Lending Index (CDLI-U-NOF), which was recently introduced by the company, had an annualized return of 7.23%. By contrast, the Morningstar LSTA US Leveraged Loan index yielded 4.9% annual returns, while the SPDR Blackstone Senior Loan ETF had returns of 3.31%.

“In today’s world, where there are seemingly too many asset classes competing for allocators’ capital, public credit – bank loans and high yield bonds – is likely expendable in favor of private credit which offers returns 3% to 4% higher, after adjusting for fees,” said Stephen Nesbitt, CEO of Cliffwater.

“By itself, that return difference more than justifies the liquidity give-up for going private, and with the advent of private credit vehicles like perpetual BDCs [Business Development Companies] and interval funds, investors can come close to having both the higher return and comparable liquidity. That leaves public credit out of the mix.”

Nesbitt stated that the findings would be problematic for investment firms attempting to combine private and public credit, adding that the evidence “strongly points to investors allocating most, if not all, their credit allocation to private solutions.”