The Case for Active Management in the Private Credit Market

Though investment vehicles like the exchange-traded fund (ETF) have democratized access to private credit investments, the need for active management is still imperative in this burgeoning asset class.

As the market matures and economic cycles become increasingly unpredictable, the “set it and forget it” approach inherent in passive funds may not be sufficient. Below are reasons an active approach to private credit is a necessity in the current macroeconomic environment.

See More: From Institutional to Public Portfolios: Access Private Credit With PCR

Navigating the Complexities

Private credit is more inherently complex than the traditional bond market. In comparison, private credit information comes at a deficit. That’s because private credit loans are essentially bespoke agreements between a lender and a private borrower. Given this, active managers can conduct the necessary and rigorous research that retail investors are unable to access.

Furthermore, active managers in private credit can evaluate the complexities that come with loan covenants, management quality, and the specific business-model resilience of the borrower. In a private credit environment, the fund manager must actively monitor the health of the underlying asset to mitigate default risk.

Yield Optimization

In today’s uncertain interest rate environment, yield is important to fixed income investors. That said, private credit exposure can help diversify yield regardless of whether the macro environment is conducive to the U.S. Federal Reserve raising or cutting interest rates.

Active managers are uniquely positioned to navigate the cyclical nature of yield. They can optimize portfolio composition in real-time, capturing superior rate yields along with risk-adjusted returns through disciplined credit selection.

An Active ETF Option

Last, but not least, active management can lead to creative solutions for investors to get private credit exposure. One such creative solution is the Simplify Private Credit Strategy ETF (PCR). The fund’s goal is to generate income and capital appreciation by investing the majority of its net assets in securities from the VettaFi Private Credit Index. As of April 30, the fund comes with a distribution rate of almost 11%, which should be enticing to yield seekers.

PCR invests in total return swaps linked to the constituents found within the index. The index specifically tracks private credit instruments held by publicly traded U.S. business development companies and closed-end funds that allocate over 50% of their portfolios to non-publicly traded corporate loans, syndicated debt, or high-yield bonds.

PCR provides investors with the necessary active exposure that includes the accessibility, liquidity, and cost efficiency of an ETF wrapper.

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VettaFi LLC (“VettaFi”) is the index provider for PCR, for which it receives an index licensing fee. However, PCR is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of PCR.

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