From Concentration to Strategy: Diversification in Private Credit Investing
Over the past several years, private credit has evolved from a niche allocation to a core component in many financial advisors’ portfolios. What was once the domain of large institutions is now available through a range of accessible structures that include business development companies (BDCs), tender offer funds, interval funds, and traditional LP investments.
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In AFA’s conversations with advisors, one theme is clear: private credit has earned a permanent place in portfolio construction, with most advisors actively planning to increase their exposure to the asset class. In fact, our 2024 survey of RIA private credit usage underscores the sector’s rising importance: 80% of firms either already allocate to private credit or plan to make their first investment in 2025, and 82% plan to increase allocations, with many adding new funds.
Yet, before simply adding more exposure, it may be wise to pause. A careful reevaluation of your current portfolio can ensure you are optimizing allocations across strategies, structures, and liquidity profiles.
Here are several ways to begin the process of building a resilient and diversified private credit portfolio:
1. Assess What You Already Own
If you already invest in private credit, the first step is understanding your current exposure. The term “private credit” is often used broadly, encompassing strategies that may not be purely private, or even truly credit-focused. Key questions to ask include:
- Is this investment truly private credit, or is it something else marketed under that label?
- How much leverage is involved, and does that align with client risk tolerance?
- Are the underlying loans fixed or floating rate and susceptible to interest rate risk?
Our earlier QuickTake Is Your Private Credit Fund Truly “Credit?” offers a deeper look at these distinctions and provides a framework for evaluating current holdings.
2. Strategically Add Complementary Strategies
Reducing concentration risk requires more than adding another fund that mirrors the first. Instead, consider diversifying across lending types and borrower profiles, such as:
- Cash-flow lending for exposure to the main private credit segment.
- Asset-based lending (ABL) for downside protection through collateralized loans.
- Large and smaller loans to capture all segments of the market place.
Blending strategies such as cash-flow lending with ABL can create a more balanced allocation—one that captures income and downside protection to build resilience. Our AFA Perspective Optimize Your Private Credit Exposure: A Framework for Diversifying Beyond Corporate Direct Lending offers a structured approach for evaluating complementary strategies.
3. Prepare to Weather Potential Downturns
Private credit has historically delivered attractive returns with lower correlation to public markets. Still, no asset class is immune to economic stress. Diversification across strategies is one defense, but advisors should also:
- Prioritize defensive strategies such as ABL, which is secured by tangible assets.
- Consider sectors with lower sensitivity to macroeconomic cycles (e.g., healthcare, certain real asset-backed lending).
- Evaluate liquidity terms and redemption provisions to ensure portfolios remain flexible if market conditions tighten. Each type of private credit vehicle (e.g., BDC, tender offers, interval funds) can offer varying levels of flexibility for redemptions.
Building Lasting Allocations
Private credit has secured its role in modern portfolios, but maximizing its benefits requires moving beyond concentration toward strategy. By reassessing current holdings, layering in complementary strategies, preparing for downturns, and considering both liquidity and manager selection, financial advisors can construct allocations that are built to last.
The result: portfolios that not only aim to capture the income potential of private credit, but also deliver durability across market cycles.
Disclosures
Alternative Fund Advisors, LLC (“AFA”) does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AFA recommend that the information presented serve as the basis of any investment decision.
AFA is the investment adviser of the AFA Asset Based Lending Fund, a continuously offered closed-end interval fund. An investment in the Fund involves risk. The Fund’s investment in private credit securities is speculative and involves a high degree of risk, including the risk associated with leverage. Read the prospectus carefully before you invest. Investors should carefully consider the Fund’s investment objectives, risks, charges and expenses before investing. This information is contained in the Fund Prospectus and a copy may be obtained by calling 800-452-6804 or by clicking here.
The findings from the AFA 2024 RIA Private Credit Usage Survey have been obtained or derived from sources believed by AFA to be reliable. However, AFA does not make any representations or warranty, express or implied, as to the information’s accuracy or completeness, nor does AFA recommend that the attached information serve as the basis of any investment decision. The views expressed reflect the current views as of the date hereof. This document has been provided solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments, and may not be construed as such. Any illustrations and views expressed should not be construed as investment advice or a guarantee of future results and cannot account for future economic conditions. All graphical representations set forth herein are based on the information AFA obtained through the survey commissioned by AFA and conducted by Excella, Inc.
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