Pick a number between zero and twenty. It turns out that any one of them might be the closest you can get to a good estimate of private credit default rates. A new report from Bloomberg’s Kat Hidalgo explains the wide variety of estimates of private credit default rates. Hidalgo writes:
Either private credit has a serious default problem, or barely one at all — it all depends on who’s counting.
Fitch Ratings, for instance, put the default rate at a record 6.3% this week, adding its weight to the crowd of observers flagging mounting stress. Credit rating agency KBRA’s latest measure also pointed to a new high.
Yet by other measures, there’s little issue. Weigh the market by loan size and defaults remain below 1% because the largest borrowers continue to perform, investment bank Houlihan Lokey Inc. found.
Later, she notes that PIMCO’s measure of “shadow” default rates is up to 19%. Hidalgo records many other estimates besides, with a wide array of values between 0% and 20%.
One key point Your Survival Guy has made over and over again in this series is that private equity and credit portfolios are opaque when compared to traditional publicly traded securities. If PIMCO, Fitch, KBRA, Houlihan Lokey, and other big professional outfits can’t decide on a default rate for private credit, how is a typical 401(k) investor supposed to evaluate them?
Action Line: Are private equity and credit investments inherently bad? No, that is not what this series is about. But investors should exercise due diligence with any investment, and that’s more difficult to do when less information is publicly available. Be careful when and if private equity or credit investment opportunities hit your 401(k). And when you want to talk about your portfolio, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
Read the entire series here.
