Senior secured loans are the next best investment, Bluerock says

investmentnews.com:

No matter your thoughts on it, private credit is here to stay.

Miguel Sosa, head of market research and strategy at alternative asset manager Bluerock, thinks there are strong reasons investors should be narrowing in on private credit, especially in the next five years.  

Over that time period, private credit is projected to outpace stocks, bonds, and the 60/40 portfolio Sosa says. Given the relative valuations, private credit should outperform asset classes in that five-year timespan whose valuations might be stretched relative to historical averages.

“The appeal of private credit is caused by this fundamental shift that we’ve seen in equities markets and in fixed-income markets, really driven by the fundamental shift in monetary policy,” he explains. “If we look at the 2010s, that entire decade was an ideal period for equities markets, because interest rates were at zero, and were close to zero for an extended period of time. That low financing cost benefited equity investors. With such low interest rates, credit investors weren’t generating as much returns.”

The tables have turned more recently, Sosa notes, since with higher interest rates, the credit market becomes much more appealing.

In addition, equities potentially face a more challenging environment because of higher borrowing costs, which he says will be what “differentiates the good performers from bad performers.

“In other words, the capital owners are lending out capital to the lenders versus the borrower. So it’s a very, very attractive backdrop,” Sosa says.

Another type of investment investors should be considering is senior secured loans, Sosa said, as they offer better exposure for income investors given higher yields and their lower correlation to