When Smooth Returns Hide Real Risk in the Late-Cycle Credit Environment
The evolution of leveraged finance credit markets over the past five years should prompt investors to recalibrate their expectations when assessing private versus public credit today, particularly from an alpha-generation and late-cycle perspective.
At a broad level, private credit portfolios relative to public credit portfolios have underperformed since 2022, are less liquid, have lower credit quality, higher industry concentration and are the more expensive financing option for borrowers. By not marking-to-market daily, it allows private credit shops to “volatility launder”, as coined by AQR’s Cliff Asness, and market strong Sharpe ratios as return volatility is artificially lower.
The period for significant alpha generation from private credit is behind us. We expect public credit outperformance of private credit, broadly speaking, to continue, particularly on a risk-adjusted basis.
The landscape has changed, and we urge investors to know what they own and be highly aware of the distinct differences when assessing the different trades that are: Private vs. Public Credit.
Mr. Cohen joined DoubleLine in 2012 and serves as Director of Global Developed Credit. In this role, he oversees the firm’s corporate credit team and is the lead portfolio manager for investment grade, high yield and leveraged loan credit strategies. Mr. Cohen also developed DoubleLine’s leveraged finance investment platform, which is utilized across closed-end fund, floating-rate, CLO and multi-sector fixed-income strategies. In addition, he is a permanent member of the Fixed Income Asset Allocation Committee. Mr. Cohen has over 30 years of experience in corporate credit investing. Prior to joining DoubleLine, he held investment roles at West Gate Horizons Advisors, ING Capital Advisors, Union Bank and Bank of Montreal. Mr. Cohen holds a B.A. in Economics from the University of Arizona and an MBA from the University of Southern California. He is a CFA® charterholder.
