One reason private credit markets can be *inefficient* is “complexity”.

The reason comes down to how private credit firms operate.

Private credit is about volume.

1/

While a $1bn PE fund might have 10-15 investments, a similarly sized private debt fund would have 50+.

The reason for that is simple: risk/reward. While Equity is about upside, Credit is all about downside. The more diversification, the better. 2/

Credit funds spend less time underwriting/diligencing an investment because of their seniority in the cap stack, but also because they need to pump out a higher volume of deals. 3/

Because of this, “complexity” - meaning a situation which would require more time to understand and underwrite - is viewed as a big negative 4/

A legitimate reason some private credit funds will turn down a deal is “life is too short”. Meaning: this might be a good deal, but it would take too long to figure it out, so it’s not a good allocation of time/resources. 5/

Because of this dynamic, there are legitimate opportunities, as a private credit fund, to earn attractive risk-adjusted returns, simply by rolling up your sleeves and “doing the work” 6/

Of course, the key is to identify opportunities that are more complex, but not more risky.

7/7