Family office insights this week:

• Why private credit is a family office favorite

• The McKinsey digital transformation playbook

• A BlackRock family office team podcast on the upcoming election

• How to think fast and talk well in spontaneous conversations

• A key family office role at a sustainable investments leader

Private Credit: A Hidden Gem

Private credit has quietly emerged as a powerful alternative for family offices seeking to grow their wealth.

While often overshadowed by private equity, this asset class is proving itself to be an important piece in the portfolio of many family offices.

So, why is private credit becoming so attractive, and how can family offices take advantage of it?

Let’s dive in.

What is Private Credit? 🤔

Private credit refers to loans that are not issued or held by banks. Instead, they are provided by non-bank entities, such as asset managers, hedge funds, or even family offices themselves.

In many cases, the borrowers are mid-market companies that don’t have access to traditional financing from major banks. The loans can range from $10 million to $5 billion, but are typically on the lower end of the scale.

Why is this relevant? These loans often offer higher returns because they come with additional risk, such as illiquidity or a lower credit rating. In return for accepting that risk, investors in private credit enjoy a much higher yield compared to traditional fixed-income investments.

Components of private debt 2000 to 2024 (US$m):

Source: Prequin

Why the Boom in Private Credit?

Private credit’s rise to prominence began in the aftermath of the 2008 financial crisis. Regulatory changes made it harder for banks to lend to riskier mid-market companies. This left a significant gap in the market that private credit stepped in to fill.

In fact, private credit assets under management have grown to an astonishing $1.8 trillion in early 2024, up 17% from 2022. Historically low interest rates over the past decade have encouraged investors to chase yield elsewhere.

Family offices have also used private credit to diversify their portfolios.

A Citi Bank survey suggests that family offices are allocating 3% of their AUM to private credit, but 35% are bullish on its potential (with only 13% bearish).

Why Family Offices Love Private Credit ❤️

Family offices are unique. Unlike institutional investors, they don’t answer to layers of managers, nor do they have strict mandates. This allows them the flexibility to explore different investment options, like private credits. Here’s why many family offices love private credit:

1. Higher Yield: The illiquidity premium is the extra yield investors get for locking up their money for a longer time. Private credit typically offers higher yields than public bonds or equities - sometimes as much as 400 bps above a comparable public loan. This is an attractive proposition in a world where traditional bond yields remain relatively low.

2. Diversification: Family offices are always looking for ways to diversify their portfolios beyond traditional asset classes. Private credit allows them to access a completely different segment of the market - middle-market companies that are often too small for the public market but too large for local banks.

3. Customization: Unlike public markets, where one size fits all, private credit allows investors to customize terms. Family offices can work directly with borrowers to set deal terms that fit their risk profile and investment horizon.

4. Direct Relationships: Family offices can establish long-term relationships with borrowers. This direct access offers more control over the investment process, from due diligence to negotiating deal terms.

Private credit offers several advantages to investors, including:

• Limited correlation with public markets: Helps diversify portfolios.

• Steady income: Provides regular cash flow through interest and fees

• Illiquidity premium: Investors earn a higher return, typically 250 basis points more than leveraged loans, as compensation for locking in their capital.

• Customizable portfolios: Private credit allows for flexibility in strategy and structuring.

In 2023, the Cliffwater Direct Lending Index showed 12% total returns, with forecasts of 8.5% annual returns over the next decade.

Historically, private credit has outperformed in times of high interest rates, averaging 11.6% returns across several periods from 2008 to 2023. Losses during the COVID-19 pandemic were half that of high-yield bonds.

The Growing Role of Private Credit in Family Office Portfolios 📈

Private credit is no longer a niche. It's becoming a fundamental part of how family offices manage wealth. A few key trends are driving its importance in the family office space:

1. Filling the Gap Left by Banks

Post-financial crisis regulations, such as Basel III, have made it harder for banks to lend to mid-market companies. Private credit funds have stepped up, providing flexible financing that allows these companies to grow and innovate. For family offices, this has been a golden opportunity to deploy capital in a way that banks can’t. This trend isn’t going away. If anything, it’s accelerating. 🚀

2. The Private Equity Connection

Private credit and private equity often go hand in hand. When private equity firms conduct leveraged buyouts or other acquisitions, they need additional financing, and that’s where private credit comes into play. Family offices that already have exposure to private equity can complement their portfolio with private credit, effectively balancing risk while amplifying returns.

3. Geographic Expansion

While private credit was initially concentrated in the U.S. and Europe, it’s rapidly expanding into other regions. Family offices with a global focus can now tap into opportunities in Asia, Latin America, and Africa, where businesses are hungry for financing options outside of traditional banks.

4. Covenant Protection

Private credit deals tend to be covenant-heavy, meaning the borrower must meet certain financial conditions to stay in good standing with the lender. This provides an extra layer of protection for investors, making it easier to manage risk. In contrast, public market loans are often covenant-lite, meaning fewer safeguards are in place.

Challenges of Private Credit: What Family Offices Need to Watch Out For

Of course, private credit isn’t without its challenges.

It’s essential for family offices to conduct thorough due diligence before diving in. Some key risks include:

1. Illiquidity: One of the biggest drawbacks of private credit is the lack of liquidity. These loans are not traded on secondary markets, so family offices need to be comfortable with locking up capital for several years. Requests to extend loans are not uncommon.. and pulling the plug on a loan could endanger the borrower.

2. Credit Risk: While private credit deals offer higher yields, they also come with a higher risk of default, especially when lending to lower-rated companies. Proper credit analysis is crucial to ensure that the borrower can meet its obligations.

3. Regulation: The private credit market is less regulated than public markets, which can be both a benefit and a risk. Family offices need to ensure they’re working with reputable managers who adhere to best practices.

Why Family Offices Should Take Notice 🎯

Private credit is going mainstream. It’s a booming asset class that offers family offices higher yields, diversification, and the opportunity to customize deals.

As traditional banks continue to pull back from riskier lending, private credit will fill the void, offering family offices a way to deploy capital strategically and generate solid returns.

Family offices willing to do the work - by building relationships with borrowers, conducting thorough due diligence, and staying attuned to market trends - will find private credit an invaluable addition to their portfolios.

With private credit offering a powerful mix of flexibility, yield, and growth potential, the future for this asset class - and for family offices - is bright. 🌟

𝕏 highlights

Business schools are waking up to the family office revolution.

The risks that family offices perceive.

Another look at family office investing archetypes.

 💼 where to work

Three notable family office job opportunities this week…

GM, Family Office Client Segment - Ethic (New York / Service Provider)

Accountant - Private Family Office (New York / Single Family Office)

Senior Wealth Advisor - Wiss Family Office (New Jersey / Multi-Family Office)

📚 what to read

This week I’ve been reading Rewired: The McKinsey Guide to Outcompeting in the Age of Digital and AI by Eric Lamarre, Kate Smaje and Rodney Zemmel. 

I wouldn’t recommend this to everyone: it’s technical and written in a way that only management consultants can write, but for those interested in digital transformations, this McKinsey playbook is worth a look.

📻 what to listen to

BlackRock's U.S. Family Office team discuss the upcoming U.S. election in this In The Family audiocast.

📺 what to watch

An interesting talk from Matt Abrahams of Stanford Graduate School on communication techniques in spontaneous conversations.

And finally…

The election is closing in and crowding out most other topics on social media!

But let’s lean in… it might be interesting to publish some family office views on Twitter this week… feel free to reply to this mail with your election opinions. I will publish the best (anonymously) on Twitter.

This week saw the inaugural Dealflow newsletter. Here we shared a select group of deals for family offices. The response has been incredible. This will be back in November!

Family Office Buzz will be back on Monday, until then, see you on 𝕏 or LinkedIn

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