At Bold Wealth, we currently do not have any private credit exposure in our client portfolios. That's by choice, a decision we made about a year ago because we believed the risks outweighed the potential benefits for our clients over the short and medium term.

With all the recent news around troubled software industry exposures and funds restricting or cutting off liquidity entirely, we feel that decision has been validated. Here's our reasoning:

Liquidity mismatch: Many funds promise investors periodic redemptions, but the underlying loans are long-dated and illiquid. When confidence is frail, as it is now, redemption requests can spike and things can unravel quickly. Fund managers are forced to halt redemptions or sell positions at a discount, which creates a negative cycle: lower returns, more redemption requests, more forced selling.

Rising credit stress might lead to losses at the same time as equity markets: Private Credit funds have roughly 20% of their loans in the software industry, many of which were initiated during the boom years at very high valuations. Now, those loans are turning sour just as software stocks are also being hit. We view fixed income as a stabilizer to our equity exposure, so its role is to hold up or appreciate when equity markets struggle, not fall in tandem with them.

Lack of transparency: Private loans aren't marked to market the way public bonds are. Said differently, the price shown is usually either the original purchase price or some other estimate, not the live market value. There is also significant discretion in how they are valued; Recent events showed that some holdings were valued at par right up until they were written down to zero. When loan books are this opaque, investors can't fully assess what they own. And when that lack of visibility meets a downturn, panic-driven redemptions can pile up across all funds, regardless of how well they are run.

Our philosophy is that fixed income should be liquid, transparent, and designed to hold steady or even rise when stock markets fall. All client investments at Bold Wealth can be redeemed in their entirety in 1-2 business days, and we have no plans on changing that!

Note that we opted for different strategies to complement and enhance our traditional fixed-income exposures. More of this in future posts!

‍