The Private Credit Flood: A Warning Against the Herd Mentality
“Once a majority of players adopts a heretofore contrarian position, the minority view becomes the widely held perspective.”[i]
DAVID SWENSEN, late CIO of the Yale Investments Office
Private credit funds have been on the rise in recent years, attracting significant capital inflows, with institutional investment plans leading the charge. However, a deeper look into the nature of alternative investment cycles raises questions about the sustainability and potential risks associated with this trend.
The Alternative Investment Cycles
Looking at the history of alternative asset classes, such as venture capital and buyout funds, reveals a cyclical pattern of growth and saturation. The formation phase gives rise to new opportunities, leading to impressive returns in the early phase. However, as more players enter the market during the flood phase, returns tend to diminish due to oversaturation of capital.

Sources: Financial Times, Preqin, The Wall Street Journal; CION Investments.
Comparing traditional asset classes like equities and fixed income to alternative investments, the latter comes with higher fees, greater illiquidity, and increased complexity. Despite these challenges, institutional investors have significantly increased their exposure to alternative assets, including private credit.
The Dynamics of the Private Credit Boom
“Experience establishes a firm rule, and on few economic matters is understanding more important and frequently, indeed, more slight. Financial operations do not lend themselves to innovation. What is recurrently so described is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.”[iii]
JOHN KENNETH GALBRAITH, financial historian
The aftermath of the global financial crisis led to a surge in private credit demand, driven by tightened lending standards in the commercial banking sector. While private credit itself is not a new concept, the recent surge in popularity has raised concerns about its sustainability and long-term viability.
Investment consultants play a key role in advising trustees on asset allocation decisions, often pushing for higher exposure to private credit. However, the inherent risks and lack of transparency in this asset class raise doubts about its future returns.
Investment Consulting and Mean-Variance Obfuscation
“You don’t want to be average; it’s not worth it, does nothing. In fact, it’s less than the [public] market. The question is ‘how do you get to first quartile?’ If you can’t, it doesn’t matter what the optimizer says about asset allocation.”[iv]
ALLAN S. BUFFERD, treasurer emeritus, MIT (2008)
Investment consultants have increasingly recommended complex asset allocation strategies using tools like mean-variance optimization (MVO). While MVO can assist in visualizing risk-return tradeoffs, its application to alternative assets like private credit is limited due to the lack of precise data and skewed return histories.
The reliance on MVO models fails to account for the critical factor of skill in managing alternative investments like private credit. Consultants’ recommendations may not reflect their actual track record, exposing trustees to potential risks and subpar performance.
Barbarians at the Unguarded Gates
“Given the reality that [consulting] firm economics depend on clients continuing to use their services, why would they be expected to tell their fee-paying clients that they are on a “mission improbable?”[vi]
CHARLES D. ELLIS, former chair of the Yale University Endowment investment committee
As the private credit flood continues, trustees must be cautious of consultants’ recommendations and assess the true value and risks associated with such investments. Blindly following trends without thorough due diligence can expose institutional investors to unnecessary risks and suboptimal returns.
[i] David Swensen, Pioneering Portfolio Management, 2009 ed. (New York: The Free Press, 2009).
[iii] John Kenneth Galbraith, A Short History of Financial Euphoria, 4th ed. (New York: Penguin, 1990).
[iv] Larry Kochard and Cathleen Rittereiser, Foundation and Endowment Investing: Philosophies and Strategies of Top Investors and Institutions. (Hoboken: John Wiley & Sons, Inc., 2008).
[vi] Charles D. Ellis, Figuring It Out: Sixty Years of Answering Investors’ Most Important Questions. (Hoboken: John Wiley & Sons, Inc., 2008).