Navigating Private Credit: 4 Key Considerations for Advisors

Core Insights - The article discusses the appeal of private credit for advisors in a low-yield environment, highlighting the potential for yield premiums over traditional investment-grade or high-yield corporates. The Simplify Private Credit Strategy ETF (PCR) is presented as a vehicle to capture these benefits while managing liquidity and volatility concerns [1]. Group 1: Key Considerations for Advisors - Liquidity Management: The ETF structure provides daily liquidity, but the underlying private credit assets are less liquid. PCR uses total return swaps (TRS) to track an index of publicly traded business development companies (BDCs) and closed-end funds (CEFs), which helps eliminate reporting of acquired fund fees and expenses (AFFE) [1]. - Volatility Management: Private credit's perceived stability can be misleading due to infrequent price discovery, leading to sharp drawdowns in market stress. PCR's underlying index, the VettaFi Private Credit Index, has realized volatility over twice that of high-yield bonds. PCR employs a proprietary quality-minus-junk credit hedge to mitigate severe drawdowns [1]. - Diversification of Manager Risk: The performance disparity among private credit managers can be significant. PCR offers diversified exposure across a 52-constituent index, allowing advisors to focus on asset allocation without the need for individual manager due diligence [1]. Group 2: Pure Private Credit Exposure - Unadulterated Exposure: Many competitors face SEC's 15% limit on illiquid holdings, resulting in diluted private credit exposure. PCR circumvents these caps to provide pure exposure, ensuring clients receive 100% of the intended asset class [1]. - Direct Investment Strategy: Unlike many private credit ETFs that manage marginal exposure due to regulatory constraints, PCR aims to deliver exclusive holdings in private credit investments, enhancing the purity of exposure [1].