What should investors understand before adding private credit to their portfolio?
Many people hear the phrase private credit and assume it is just another income-producing investment. But what if the real issue is not simply the yield it offers – it is understanding the structure, liquidity, and risk that come with it?
In this episode of Retire in Texas, Darryl Lyons breaks down the growing role private credit has begun to play in today’s financial markets. He explains how private credit expanded after the 2008 financial crisis, why it became attractive to both institutions and individual investors, and how it helped fill a lending gap when traditional banks pulled back. He also walks through some of the recent stress points in the market, including investor withdrawals, concerns around software companies, and the broader conversation about risk in a changing economic environment.
You’ll learn:
• What private credit is and why it grew after the 2008 financial crisis.
• How private lenders stepped in when banks became more restricted in their lending.
• Why private credit has appealed to investors seeking higher yields.
• What recent cracks in the private credit market may be signaling.
• Why liquidity limits and withdrawal restrictions can play an important role in risk management.
• How Darryl thinks investors should evaluate exposure, risk, and portfolio fit before making any decisions.
Whether you are hearing about private credit for the first time, trying to better understand how it fits within a diversified portfolio, or thinking through how risk should be managed in uncertain markets, this episode offers a practical framework for evaluating private credit with greater clarity and perspective.
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Transcript:
Hey, this is the Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So, when I was a kid, I lived in Boerne, Texas, a small little Texas town.
Now it’s become a little bit of a suburb of San Antonio. And I remember the Cibolo Creek flooded and I guess, I don’t know, maybe I was 10 or 12, but, I mean, this was the kind of day where you just kind of rolled up your blue jeans and got your fingers dirty, and you were out until the sunset.
Right? Just that 1980s thing. And so, when it rained real hard in the Cibolo River, and then the water receded, it left these puddles. And I know exactly where those puddles were at to this day. And, in the puddles were minnows. And my young, I guess, soft heart really was concerned for these minnows. And so, I was looking at these minnows going, okay, what do I do with these minnows?
I can’t take them home. So, what I did is I started digging, I started trying to dig a path to the river, which was kind of far away. And I, you know, digging with my hands and sticks and until nighttime. And I thought about that the other day because it has some relevance in today’s marketplace, believe it or not, the tie.
Here’s how it ties this together. It has to do with private credit markets. So, you may have not heard about private credit markets. And this may be totally foreign to you, but to me it’s fascinating. So, in the great financial crisis, that’s what we call or maybe we call it global financial crisis. People now just use GFC because in 2008, the market crashed.
And there are some ramifications that took place as a result of that crash. One of the consequences is again, government getting involved. We can debate that all day long. But one of the things the government did is said, okay, banks, you can’t lend as much. I’m simplifying it. They put specific rules in place. And they said, you can’t lend as much because you’re you are part of the problem.
You lent too much to too many people and that’s the problem. But businesses still needed money for it to grow. And so basically what they did is, if you can imagine, the capital markets or the desire for money is the river. Basically, there was no pathway for the minnows to get to the river. Does that make sense trying to make that analogy there.
So, there’s no pathway to the water. It would recede. And there is no way for these minnows to get to the capital markets to be able to grow. And so, what happened is, the private industry, businesses around the country and smart financial people said, well, you know what? Banks can’t lend to these businesses. We will. And so, they started lending money to these businesses.
And I’m not talking small business. I’m talking about pretty good-sized businesses. They started lending money where banks couldn’t do it anymore. They were like, our hands are tied. We can’t lend to these businesses right now because we’ve got to maintain these certain ratios. And so, the private markets came in and said, we will start creating stick.
We will get our sticks and started creating pathways to get to the capital markets. And so, they started, you know, creating pathways to get these minnows into getting money into the businesses so they could grow. And so, the private markets came in to individual smart people around the country. And it was interesting because a lot of investors like you and me, we’re like, this is not bad because, I get to now get a little bit of a better yield because these private companies, were getting like 6, 7, 8, 9% yield versus what, you know, normal bonds, we’re paying 4 or 5.
So, there is an exceptional yield but a very attractive yield profile. Some of them are much higher than that 10, 12%. And so, like I said, smart financial people put the sticks in the mud, created a pathway to get money flowing again. And then investors were like, I want in on that. First of all, was just big business, by the way.
First of all, it’s just like pensions and these big institutions. But then the individual said, I want in, I want a piece of that. And so, then it started getting to the individuals. Here’s where it gets rocky, and here’s what you need to know about. It’s one thing to be able to do some interesting financial maneuvering. With highly sophisticated patient money, pensions, endowments, a lot of people kind of not concerned about, and I say not concerned, but will take the time to thoroughly understand the risk profile of investments.
But when you get just everyday folks like you and me and these sophisticated financial tools and things start cracking a little bit, we freak out and we do that. It’s called bank runs and it happens all the time. And, I say it happens all the time. Historically, it’s happened. So, there’s kind of a little bit of a bank run on private credit picking up what I’m dropping so far, like, I hope, I hope that, that these analogies are making sense because, again, I find it fascinating, but I’m a financial nerd.
And you may not have heard anything about private credit. Nothing. I tell you what, if you turn on CNBC, it’s talked about every single day. If not every single hour. So, it’s a big deal in the financial markets. It may have not hit your headlines yet. You may not own private credit yet.
And I’ll talk about my position on in just a second. But if you haven’t heard about it, it is a major topic. What are the cracks? So, the first crack that happened I don’t know if this is the first crack, but it’s an important crack is First Brands. First Brands is a company that went bankrupt.
So, you’re private credit, right? You’re not a bank. You lent money, you basically pooled a bunch of people together and lent money to First Brands and First Brands went bankrupt and said, I’m not paying you back because we’re toast. We’re going bankrupt. What happened there? First Brand, First Brands lied. Pure fraud. Not a company that had financial issues.
Absolute fraud. So that’s different than a financial issue. So, I think that’s important to distinguish if there’s like, a company that had financial challenges, then you start saying this could be what we call systemic, but it was pure fraud. And there was a couple of those, but it still showed cracks, in this relatively not, I want to say new, but I want to use that term loosely because there is precedent in the institutional side that these private credit tools have been used.
But show cracks. Okay. But here’s where it really gets interesting. Artificial intelligence comes in and artificial intelligence is insane, y’all. And I’ve talked about this before. I can go. In fact, I will go deeper in the next three episodes. Stay tuned. We’re going to go into artificial intelligence more. I’m going to interview somebody that really is insightful here.
So that’s scheduled. But artificial intelligence started threatening software companies. Now software companies are, this one, you may or may not be aware of some of the software companies. I mean, I guess TurboTax would be one, Intuit owns TurboTax. That’s probably one that may be top of mind for some of you guys. The big one that I think of is Salesforce.
And that’s like the biggest CRM. It’s where it stores all clients’ information. So, where we keep like names and phone numbers and email addresses and birthdays and all that stuff. It’s like this big warehouse of information. Well, software, it’s called software as a solution. That’s the type of business. It’s if you think about different businesses, you think about like industries.
There’s about nine of them categorically, real estate and energy. And then there’s this other one, which, you know, technology, but there’s subcategories, one of those subcategories of technology is software as a solution. Well, here’s what happened. Artificial intelligence, we started getting a better handle on the scope of artificial intelligence. Like what it could do. And the market is always forward thinking, always forward thinking.
And it started to say, you know what software as a solution is dead. I mean, they didn’t say it emphatically, but they started to really get this thesis going, like this idea collectively that software as a solution. That’s a dead deal. Artificial intelligence is going to take over. So, you saw what was interesting is you saw the stock prices.
Of software as a solution go down. And if you own them in your portfolio, you saw it. They went down because the market was thinking artificial intelligence is going to cut these guys out of business. But here’s where private credit comes in. Then the stock market turned its attention. It’s like or the, I guess the investors in general started saying, okay, well the stocks are going down.
They started, they looked like imagine them like going looking around the corner. Go wait a minute. What about our private credit. What’s going on in there. And it started to say wait a minute private credit lent money do these software as a solution companies. And now the thesis is these companies are going to be irrelevant. So, we lent money to companies that are going to go bankrupt, just like First Frands.
They did a bank run. They started pulling their money out. And, once you do the bank run, then it’s a problem. But here’s where private credit was smart private credit contractually to prevent bank run said we’ll only let 5% of our money of our clients, of our assets out every quarter. Generally speaking. So, this was actually pretty smart and thoughtful, because if you are managing a private credit fund, a lot of these loans that you made are not liquid like you can’t.
These are companies, long-term companies, long-term contracts. You just can’t simply just, you know, create cash for people you want. People say, I want my cash there. Like, you just can’t create cash if there’s a long-term contract. So, people collectively said, in fact in one let me see if I have it here in one.
Oh. Cliff water corporate lending fund, I don’t know that one that well, but they 14 people, 14% of the assets represented by people in institutions, said they wanted out in a given quarter. Well, they maxed it out at 5% in different ways. They prioritize that. That’s actually pretty good risk management if you think about it.
And so, if they would have let everyone take money out right away, then it could have collapsed the entire portfolio, because then they would have had to sell things that they didn’t want to sell, that they weren’t ready to sell. In order to create these requests. So, a lot of stuff. Sorry. So, to me, that was a really good risk management tool, and I think it might have saved the markets in a lot of ways by putting those prevention mechanisms in place.
I’ve talked to several private credit managers over the last or at least their representatives, the people who I have connections with over the last several weeks. I don’t know. You know, you get different stories, you know, especially when you talk to the people that manufacture products. They tend to tell you what you want to hear.
But, you know, I’ve been doing this long enough. Now, I can usually ask more probing questions and let me just give you my assessment of this private credit market. First of all, I’m thankful that the bank runs didn’t happen on private credit. I think that, you know, the market’s creating a way for people to access money is healthy.
I think it competes with banks. I think it’s reasonable. I don’t think it’s unreasonable to create the markets. I think it’s being stressed right now. I have seen a lot of the 5% max withdrawals take place across the board. I’ve seen a lot of that. Companies like Blue Owl and Aries and a lot of these companies.
But what’s interesting is they’ve actually, even though they’ve had 5% going out, they’ve also what’s interesting is had 5% coming in. This is where I think the market works well. Some people see it as a threat. Others see it as an opportunity.
I think that’s exactly how we all have to think when it comes to investing. Sometimes when people think there’s an old saying when there’s blood on the street, especially if it’s yours, it’s time to buy. I am not suggesting that you go and call your financial advisor up and say, one way or another, hey, I heard about private credit.
I’m in. I understand, I’m in it, I want out. I’m not suggesting that at all. In fact, I think that’s foolish. Nor am I suggesting that you say, hey, I think there’s blood on the streets. I want in. I’m inclined to be that way. I think here’s how you think of it your way for you. Understanding the risk of your specific investment portfolio.
Your specific private credit institutions. I think there’s some that are better than others. Clearly, there’s top of the class. And then there’s companies that, you know, maybe you’re smaller and less sophisticated institutions. You have to take that into consideration for sure. The second thing is you have to take into consideration is how much exposure do you have?
5, maybe 10% exposure is reasonable. You really don’t want to overexpose yourself to an asset class that is subject to some, you know, some challenges from time to time. I mean, there’s no free lunch if you’re getting 7, 8, 9, 10, 12% yield. When the interest rates are at 4 or 5%, you took extra risk. I mean, we all took extra.
There’s no free lunch. It’s not like you never, I’m getting better returns and there’s not a different risk profile. That’s just the way the market works. So, you have to say, okay, if I’m going to add more to my private credit position, then I have to say, is that a reasonable risk? Risk decision for some of you guys, you may say, hey, this looks like an opportunity and I only have 3%.
I want to get it up to 5%. I think that’s a reasonable assessment for some of you. If you’re at 10% or 15%, you have to ask yourself, hey, did I overexpose myself and maybe taper that down? I think that’s reasonable too. So, I say that because I don’t want to give you like, this is where personalized advice comes in.
This is why I have conviction that financial advisors so important, they have to consider your specific, unique situation and say it doesn’t make sense for you. And then keep in mind, too, some of you guys are listening. There’s minimums on these things. So, you know, you just can’t go in and say, hey, I’ve got 250 bucks.
I want to put some money in private credit. That’s usually not the case. I say usually because there’s this little caveat. You can buy a publicly traded BDC. Totally different animal. So if you’re a nerd out there and trying to second guess me, I do know that there are ways. But generally speaking, private credit is an asset class that has a risk profile that is reasonable but needs to be, I think probably, I don’t know, probably, somewhere between a traditional stock and a traditional bond.
I think that’s reasonable. And it needs to be allocated within, I think, a reasonable percentage. So, all that to be said. I never saved the minnows. Sometimes I think about the minnows. I think about that because I drive through that same road in Boerne once a month and I say once a month, maybe it’s every other month. And every time I drive across the creek, I think of those minnows, the capital markets find a way to get money to businesses that want to grow.
If the banks aren’t going to do it, the people will. How those are designed, are subject to some risk and stress test, if you were to ask me. And Zack’s actually. And I’ll put this in the show notes. Zack’s supports this is a wearable event that doesn’t appear to be systemic, meaning that we will get through.
This may be a little bit scary at times. But it doesn’t appear to be something that will collapse or infiltrate the market to the degree that we experienced in the 2008 global financial crisis.
Private credit. Thank you for listening today. Remember, you think different when you think long term. Have a great day.
Resources:
https://www.callan.com/blog/3q25-private-credit/
https://www.stepstonegroup.com/news-insights/cutting-through-the-noise-in-direct-lending-headlines/
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