Chris Loeffler, the CEO of CaliberCos Inc., an alternative asset manager, believes that private credit investments can be a valuable part of a portfolio but may be riskier than they seem. Private credit involves lending by nonbank entities to private businesses or real estate partnerships. Since the 2008-09 financial crisis, private credit has grown significantly, with global assets exceeding $1.6 trillion in early 2023 and expected to surpass $3.5 trillion by 2028. Investors are attracted to private debt for portfolio diversification, low correlations to public markets, and high returns.
However, when evaluating private credit investments, it’s essential to consider the risk involved. Many loans are directed to smaller, less-profitable companies that are heavily leveraged and may struggle to generate positive cash flow under stressful scenarios. Companies often pay a premium to private lenders for speed and agility, making private loans costly. Investors should ensure they are comfortable owning the collateral underlying a loan and taking over operations in the event of default.
An alternative to private credit investments is equity investments in core-plus real estate strategies. Core-plus real estate involves acquiring properties with stable income streams and potential for enhanced returns through strategic value-add initiatives like renovations, lease restructuring, or operational improvements. These strategies offer investors the opportunity for increased income and appreciation with more favorable risk-adjusted returns compared to opportunistic or value-add strategies.
Despite the potential for higher returns, core-plus properties come with inherent risks, such as susceptibility to market fluctuations and economic downturns. Investors should carefully assess a core-plus fund manager’s expertise in property management, construction, and market analysis to understand the associated risks fully. It’s important for investors to align their financial objectives with the investment strategy and consider factors like timing and the experience of the owner.
In conclusion, core-plus real estate can be a compelling alternative to private credit investments for investors seeking higher returns and more favorable risk-adjusted returns. However, it’s crucial for investors to understand the potential risks and rewards of core-plus properties, as well as consider their individual financial goals, risk tolerance, and ability to hold illiquid investments. Consulting with a licensed professional is recommended before making any investment decisions.
