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So What If Alt Credit Is Like Fentanyl?

Feb 12, 2020

The success of the alternative private credit market has earned some scrutiny, and questions about whether it’s too good to be true.

Recently Dan Rasmussen and Greg Obsenshain of Verdad Advisors wrote in Institutional Investor that private credit is like the addictive painkiller Fentanyl, and cautioned allocators about getting too deep into funds pursuing this market. It’s stirred conversation.

What to do?

Well, if private credit is like Fentanyl, it may be highly addictive, but it’s also an important and powerful tool in the hands of sophisticated healthcare providers. It’s a critical painkiller that can save, or kill, depending on who is measuring, administering and monitoring it.

The same may be said for private credit if Rasmussen and Obsenshain’s points prove out. Think of it in terms of the physician you are loyal to. Who do you trust with a difficult operation, or to take a challenging health problem to? Presumably a doctor who has built her practice in a sophisticated, data-driven environment where they’ve earned your loyalty through precision.

You would be less likely to take a sensitive condition to a doctor whose operation is questionable, and potentially prone to errors.

Indeed, demand for private credit vehicles may be driving solutions that won’t weather a downturn. Characteristics of fragility include not being able to quickly pin down where all the financing is and document it. Untangling complex mortgage vehicles, as the Great Recession taught, requires traceability and rewarding investors with an automated system that allows them to be in control and secure in their relationship with asset managers.

This is not a market in which to rely on Excel sheets and fancy macros that may propagate errors with cutting and pasting. Nor will allocators tolerate a lack of traceability and waiting days or weeks to understand their exposures.

Caution is in order, for both allocators and asset managers. In any market that’s relatively new, complex, and potentially illiquid, it’s important to ask what data operations infrastructure is in place, and how dependable it is. Maybe it’s time to test that in private credit?

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