Chris Loeffler, the CEO of Caliber, is leading the way in alternative asset management with approximately $2.9 billion in assets under management. Private credit investments have become a popular choice for investors seeking double-digit returns, but these investments may be riskier than they seem. Loeffler believes that relying solely on private credit for returns may not be in the best interest of clients and suggests considering equity investments in cash-flowing real estate as a complementary strategy for a balanced and diversified portfolio.
Private credit, defined as lending by nonbank entities to private businesses or real estate partnerships, has experienced significant growth since the 2008-09 financial crisis. The appeal of private credit lies in further portfolio diversification, low correlations to public markets, and relatively high returns. Assets under management in private credit have grown from under $400 billion in 2012 to over $1.6 trillion in early 2023, with expectations to exceed $3.5 trillion by 2028.
Despite the growth in private credit, there are risks associated with these investments. Many loans are directed towards smaller, highly leveraged companies that struggle to obtain funding from traditional banks. These borrowers often pay a premium to private lenders for speed and certainty, making their cash flow vulnerable under stressful scenarios. S&P Global Ratings and The Wall Street Journal have identified companies with unsustainable capital structures that could struggle in unfavorable economic conditions.
To mitigate the risks associated with private credit, investors may consider equity investments in core-plus real estate strategies. These strategies involve acquiring properties with stable income streams and value-add opportunities through renovations, lease restructuring, or operational improvements. While core investments focus on stable, fully leased properties, core-plus strategies offer slightly higher returns with increased risk due to market conditions and active management requirements.
Investing in core-plus real estate offers the potential for higher returns compared to core investments through strategic enhancements. These properties also provide more favorable risk-adjusted returns compared to opportunistic or value-add strategies. However, investors must be cautious of market fluctuations, economic downturns, and operational risks associated with core-plus properties.
Investors working with core-plus fund managers must assess their expertise in property management, construction, and market analysis to align with their investment goals. It is important to understand the risks and rewards of value-add initiatives, as well as the timing required for the investment strategy. While core-plus real estate can be an attractive alternative for some investors, it may not be suitable for everyone depending on their financial goals, risk tolerance, and tax situation. Consulting a licensed professional is recommended for tailored investment advice.
