Private credit and crypto are two of the most disliked asset classes in the market right now. That reputation alone is exactly why some investors assume opportunity is hiding there. It’s a reasonable instinct, and it’s also worth slowing down before you act on it.
A version of this question comes up often: someone wants to replace a small piece of their equity allocation with private credit, spread across multiple managers so no single one represents more than ten percent of the fund, with the goal of bringing down volatility without giving up returns. It’s a thoughtful structure. It also comes with a few things worth understanding clearly before you commit capital.
Replacing Equity, Not Your Bond Allocation
If you’re going to carve out a piece of the portfolio for private credit, equity is generally the right place to pull it from rather than your existing bond allocation. Private credit sits on the debt side of the ledger, but that doesn’t make it a substitute for your investment-grade bonds. It’s a different risk profile entirely, closer in spirit to a high-yield, illiquid credit exposure than to the ballast a traditional bond portfolio provides.
The Due Diligence Question Nobody Wants to Ask
Even though private credit is technically debt, it isn’t risk-free debt. Some of the recent controversy around the space comes down to a basic question: has real due diligence been done on who’s actually borrowing this money, and can they pay it back? Spreading exposure across multiple managers reduces manager-specific risk, but it doesn’t answer the underlying credit quality question. That has to be evaluated fund by fund.
Why Private Credit Looks Calmer Than It Actually Is
Here’s the part that matters most. Public bond funds get marked to market daily, so you see every fluctuation in value as it happens. Private credit is often revalued quarterly instead. Think of it like taking someone’s temperature every five minutes versus once every three months. Taking it every five minutes, you catch every fever as it happens. Taking it once a quarter, that same person could look perfectly healthy the entire time between readings, even if they were sick for weeks. Private credit’s smoother appearance doesn’t mean the underlying risk is actually lower. It often just means you’re not seeing it in real time.
The Illiquidity Premium Isn’t Free Money
Private credit typically pays an illiquidity premium, additional yield in exchange for locking up your capital. That premium shouldn’t be mistaken for free alpha. Bonds and credit are supposed to function as the shock absorber in your portfolio, the piece you lean on during genuine market stress. That’s exactly the moment private credit funds may restrict redemptions, because everyone else wants their capital back at the same time. The part of your portfolio meant to provide stability in a downturn can become the least accessible part right when you need it most.
Fees Layer on Top of Fees
Diversifying across multiple private credit managers has a real cost beyond the underlying credit risk. You’re generally paying each manager a fee, and then paying an additional fee at the fund-of-funds level for the privilege of spreading exposure across them. That layered fee structure eats into any excess return the strategy is trying to capture, and it’s worth running the math on what’s actually left over after all the fees are accounted for.
Lower Volatility on Paper Isn’t Lower Risk in Practice
None of this means private credit is a bad idea as a diversifier. It can genuinely reduce the volatility you experience in a portfolio, and for the right investor with the right time horizon, it can be a reasonable piece of an alternatives allocation. The mistake is treating the smoother, quarterly-marked price as evidence of lower actual risk. Before allocating, ask hard questions about underwriting quality, understand what happens to your liquidity in a downturn, and add up every layer of fees involved. Do that homework, or have us, your advisors, do it with you, and private credit can be a legitimate diversifier rather than a source of surprises later.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on private credit as a portfolio diversifier, listen to the full podcast episode here.