Credit segment allocation has a significant effect on performance
Chart disclosure: The information presented above is hypothetical in nature and is shown for illustrative purposes only. Each hypothetical model portfolio’s construction targets allocations discussed in the text above. Model portfolios were constructed based on custom sub-composites of funds in Preqin’s private credit universe. Sub-composites were created in Preqin for each fund that fit into the three private credit segments delineated above (corporate credit, asset-based lending, and niche strategies). The total return (net IRR) for each sub-composite was calculated based on quarterly returns from 6/30/2020 to 12/31/2024. The historical risk-adjusted return is calculated using risk/standard deviation to reflect return per unit of risk. Returns shown are gross of portfolio level management fees and carried interest, but net of underlying management fees and carried interest. If portfolio level management fees and carried interest were applied returns would be lower. Hypothetical model performance results are inherently limited and should not be considered a reliable indicator of future results. One of the limitations of hypothetical performance results is that they are prepared with the benefit of hindsight. No representation is being made that any private credit allocation will or is likely to achieve profits or losses similar to those shown. This information should be used solely as a guide and should not be relied upon to manage your investments or make investment decisions. Investments in private funds involve significant risks, including loss of the entire investment. See Disclosures at the end of the paper for important information on this hypothetical illustration.
Key takeaway
Allocations across credit sectors may enhance the risk/return profile of private credit portfolios.
As investors increase exposure to private credit, a framework for portfolio construction can help manage the market’s increasing complexity for investors targeting the highest risk-adjusted returns. To illustrate, we evaluated four hypothetical model portfolios with varying allocations to the three core private credit segments: corporate credit, asset-based lending, and niche strategies.
Findings:
- The 100% corporate credit portfolio had the lowest total return and the lowest return per unit of risk.
- The 70% corporate credit / 30% asset-based lending portfolio had a higher total return, and a higher return per unit of risk.
- The 60/30/10 portfolio yielded the second-highest total return of the four portfolios and the highest return per unit of risk.
- The 50/35/15 portfolio posted the highest total return of the four, but trailed the 60/30/10 portfolio on a return per unit of risk basis.
For allocators seeking deeper insights into private debt investment structures and implementation options, see our recently published “A Framework for Private Credit Portfolio Construction.”
The HarbourVest advantage
Disclosure
Diversification does not ensure a profit or protect against a loss.
HarbourVest Partners, LLC is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes and should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy, or completeness of such information. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
Nothing herein should be construed as a solicitation, offer, recommendation, representation of suitability, legal advice, tax advice, or endorsement of any security or investment and should not be relied upon by you in evaluating the merits of investing in HarbourVest funds or in any other investment decision.
Credit Strategy Risks: A fundamental risk associated with credit investments is credit risk, which is the risk that a borrower will be unable or unwilling to make principal and interest payments on its outstanding debt obligations when due. Investments in subordinated or junior debt investments, should an issuer trigger an event of default, depending on the capital structure and the issuer’s financial situation, a loss of the entire value of the investment is possible. Adverse changes in the financial condition of an issuer or in general economic conditions (or both) could impair the ability of such issuer to make payments on its debt and result in defaults on, and declines in, the value of its subordinated debt more quickly than in the case of the senior debt obligations of such issuer. Adverse changes in the financial condition of an issuer or in general economic conditions (or both) could impair the ability of such issuer to make payments on its debt and result in defaults on, and declines in, the value of its subordinated debt more quickly than in the case of the senior debt obligations of such issuer.
Hypothetical Models: Model results are hypothetical and inherently limited. They should not be relied upon as indicators of future performance. Individual fund and strategy performance can be better or worse than the model. No investor received the indicated hypothetical model performance. Certain assumptions have been made for modeling purposes. No representation or warrant is made as to the reasonableness of the assumptions made. Changes in the assumptions may have a material impact on the hypothetical returns presented. Different hypothetical model scenarios will provide different results. While the model portfolio may consist of investments made by HarbourVest during the relevant period(s), it does not reflect an actual portfolio managed by HarbourVest during the relevant period(s) and does not represent the impact that material economic and market factors might have had on HarbourVest’s decision making if HarbourVest had been managing a fund that incorporated the investment strategy shown during the specified period(s).
In addition, investment results may be materially different from the results portrayed in the model portfolio during the relevant period(s). Actual investments may have substantially different terms than those reflected in the model portfolio. No representation is made that any investment will or is likely to achieve returns similar to those presented, and there can be no assurance that an investment will achieve profits or avoid incurring substantial losses. Other periods selected for the model portfolios may have different results, including losses. Current model results may differ from those shown.
Hypothetical Model Methodology: The model portfolios were constructed based on custom sub-composites of funds in Preqin’s private credit universe. Fund inclusion in each composite was determined by the stated strategy or objective of the fund. The corporate direct lending composite includes direct loans to primarily private equity backed companies. The Asset-Based Lending composite includes funds involved in aviation finance, consumer credit, residential mortgage-backed securities, and/or credit related strategies secured by hard assets. The Specialty Finance composite includes funds that provide financing based on royalty income streams, litigation claims, and/or insurance linked income. The period under review covers June 30, 2020, through December 31, 2024, which represents the total combined time period in which performance data was available for all three sub-composites. The Corporate Direct Lending sub-composite includes 90 funds, the Asset-Based Lending sub-composite includes 35 funds, and the Niche/Specialty Finance sub-composite includes 7 funds. Each sub-composite contains all representative funds with performance data available through Preqin for the time period covered. Performance and risk metrics were calculated based on past results and no projections or forecasts are included in the analysis.
