Since launching in early 2023, Cresset’s flagship private credit fund (“CPCF” or the “Fund”) has provided positive returns in a market that is uniquely positioned to benefit private credit investors. We think that the current investment opportunity within private credit, particularly in the core middle market, is expected to remain favorable in an otherwise choppy economic environment. Investors in the private credit asset class continue to benefit from higher base rates, wider spreads, and stronger covenant protections—compared to the beginning of last year.
Cresset designed CPCF to invest in a diversified portfolio of first-lien, senior secured loans to middle market borrowers. Importantly, the Fund invests with scale and efficiency through strategic programs and partnerships with leading credit managers.1 Cresset’s strong brand reputation has allowed it to forge partnerships with seasoned credit managers and invest alongside them through separately managed accounts, joint ventures, and other bespoke structures. These partnerships have resulted in reduced investor fees compared to many existing private credit market access points.2
To lead the Fund, Cresset Partners has hired Bradley Schneider as Managing Director, Head of Private Credit. Schneider, who most recently was Head of Private Credit with Midwest Holding, brings more than 20 years of experience focused on private and alternative credit investing.
Strong performance to date
CPCF began investing in April 2023 and paid a 2.75% distribution (11.5% annualized) to investors for the Q3 2023 period. Based on a strong pipeline of investment opportunities, the Fund expects to accelerate capital deployment throughout the rest of the year and into 2024.
Currently, CPCF has more than $350 million in committed capital and more than 300 underlying loan investments, 95% of which are first-lien senior secured.
A favorable outlook for private credit
The private credit market has experienced transformative changes over the past three years with a combination of macroeconomic and geopolitical events, impacting the market and shaping the favorable setup we see today.
The emergence of the COVID-19 pandemic disrupted capital markets activity in early 2020, including private credit. However, by the latter half of the year, lending activity experienced a strong rebound in response to supportive central bank actions and favorable interest rates. These tailwinds facilitated an 18-month span of unprecedented lending activity.
Market dynamics shifted in mid-2022 due to concerns around rising inflation. In response, the Fed commenced several rounds of rate hikes, which have had a pronounced impact on the private credit market’s base rate: the Secured Overnight Financing Rate (“SOFR”). SOFR averaged less than 1% from 2020 through early 2022. However, in response to rate hikes, SOFR climbed to 4% by year end 2022 and exceeded 5% as of Q3 2023. This dramatic change in base rate offers the potential for significantly better returns for private debt lenders and investors.
Turmoil in the banking system in the first half of 2023, including the failures of Silicon Valley Bank and First Republic Bank, also impacted the private credit market significantly. These events led to increased risk controls throughout the banking sector, and banks that were historically strong lenders in the middle market space became less willing or able to conduct business as usual. Private debt lenders stepped up to provide their services in this dynamic, resulting in higher returns, more robust lender protections, and a greater percentage of equity capital funding.
Relative to broadly syndicated loans, private loans offer a significant pickup in spread, generally offering investors a 1-4% yield premium. While inflation has cooled it is still above the Fed’s desired level of 2%. This, coupled with a strong labor market, suggests the Fed’s ability to meaningfully reduce rates will be pushed further into the future – a favorable dynamic for returns for floating-rate private credit.
Looking ahead, we believe that CPCF is positioned to perform well on an absolute and relative basis. The Fund has benefited from commencing operations in 2023, which allowed capital to be deployed through the lens of a high-interest rate world and invested into newer vintage loans with better interest coverage metrics, lower LTVs, higher spreads and tighter covenants. Deal flow continues to expand as the M&A market normalizes, with increased opportunities to invest in high-quality loans that fit the investment objectives of the Fund.
- Pitchbook 2021 Annual Interactive PE Lending League Table.
- Reduction compared to average commingled private credit fund, per Cliffwater 2023 Study on Private Funds Fees & Expenses for Direct Lending. Returns for the short-term are not indicative of long-term future returns. In addition to Cresset fees, this fund has underlying manager fees and expenses.
An investment in the Fund is speculative and involves a high degree of risk. The program is not suitable for all investors. The shares are illiquid with significant restrictions on transferability and resale. You will likely not be able to redeem shares when you choose. Each investor or prospective investor should be aware that they may be required to bear the financial risk of this investment for an indefinite period of time. An investor may lose all or a substantial part of its investment. The fund does not represent a complete investment portfolio. There can be no assurance that the investment objectives of the Fund will be achieved. The managers and portfolio structure provided herein may be subject to change. Read the PPM fully and speak with your personal financial advisor prior to investing. Investor returns will be offset by the fund’s significant fees and expenses. Past performance is no guarantee of future results.
There can be no assurance that the Fund will be able to implement its investment strategy or achieve its investment objective or that an investor will receive a return of its capital. These type of investments can experience a highly competitive environment for purchasing assets making advantageous pricing difficult to obtain.
No Reliable Private Fund Data. There is no complete and reliable data set for private investments. The information is very limited and the majority of data is compiled from funds that elect to self-report and may be biased toward higher performing funds. Losses are underreported. Funds included in these measures may lack commonality. Over time, components of the data may change. Funds may begin or cease to be represented based on these factors, thereby creating a “survivorship bias” that may additionally impact the data reported.
Suitability of Investing in a Series; No Assurance of Investment Returns. Investment in this Fund is for financially sophisticated investors. Investors should consult their professional advisers to assist them in making their own legal, tax, accounting and financial evaluation of the merits and risks of investment in this fund in light of their own circumstances and financial condition. An investment in the Fund requires a long-term commitment.
Foreside Fund Services, LLC provides marketing services, Member FINRA. Foreside is not affiliated with the product being offered or any of the other entities named in this communication.
This is not intended to be a complete list of the Fund’s features, benefits, risks and disclosures. Please refer to the Fund’s Offering Materials for more information.
Fund-of-Funds Risk. The Private Credit Fund (Onshore Feeder) is structured as fund-of-funds and are subject to the same risks as the Funds they hold. Investors will incur the expenses of the Fund in addition to fees of the underlying Funds in the portfolio.
Interest Rate Risk. Interest rate risk is the potential for investment losses that can be triggered by a move upward in the prevailing rates for new debt instruments.
Senior Secured Loans and Senior Secured Bonds. Does not guarantee full repayment. These debt instruments may default given the collateral may be insufficient to meet the obligated debt payments, or for other reasons. Senior Secured Loans are considered priority debts in the case of liquidation or bankruptcy.
Subordinated Debt. The fund may invest in subordinated debt instruments, which will generally be unsecured and rank junior in priority of payment to senior debt. This can result in heightened risk, volatility and potential losses.
International Investing. Investments in foreign securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited or unique regulations.
Below Investment Grade Risk The fund may invest in securities that are rated below investment grade. This debt is often referred to as “junk,” can be difficult to value and may be illiquid. The lower a security’s rating, the greater the vulnerability to losses and defaults.
Less Established Credit Manager. The Fund may invest a portion of its assets in the underlying investments of less established Credit Managers. These Credit Managers are more vulnerable to failure, lack of experience, accounting irregularities, and tend to involve much greater risks.
Availability of Suitable Investments. The Fund may be unable to find a sufficient number of attractive opportunities to meet its investment objectives.