Investments: Private Credit Turmoil
If you have checked the news recently, you have likely heard a lot of talk about the private credit industry and its recent woes. Private credit, which consists of loans from lenders outside the traditional banking system, such as institutional investors and private funds, has exploded onto the scene in recent years. Most of the loans are to smaller companies who desire flexible loan structures and faster deal execution. Private Credit has attracted investors by offering a higher yield and lower price volatility than normal public lending, largely due its floating rate nature and limited mark-to-market fund pricing. It also offers investors a way to diversify away from traditional public markets. However, this comes at the expense of liquidity, with redemptions being limited to small increments, often no more than 5% quarterly. Up until recently, defaults were low and returns were high. However, as market valuations have become stretched and market sentiment around sectors such as software, which make up a large portion of private credit exposure, have soured, defaults have begun to rise. As a result, investors have started to seek the exits, as investors have pulled out over an estimated $11 billion from private credit funds over the last six months. Due to the illiquid nature of these funds, some firms have even begun limiting redemptions. All this being said, do I believe private credit is breaking? No. Do I believe it is being tested? Yes. After years of loose underwriting and high growth, I believe the private credit industry is having a healthy reset, one where poor credit underwriters with weak credit discipline chasing high yields are being punished. On the contrary, strong, disciplined underwriters will look to weather the storm in an industry that is coming into maturity and beginning to more accurately price the risks that come with illiquid private lending. This bodes well for long-term investors.
Planning: Charitable Bunching
As of January of this year, the One Big Beautiful Bill Act (OBBBA) introduced a new minimum threshold for charitable deductions. Individuals can now only deduct qualified charitable contributions over 0.5% of their adjusted gross income (AGI). In layman’s terms, the first 0.5% of AGI is not deductible. For a household with an AGI of $200,000, the 0.5% floor would be $1,000. If they were to give $2,000 to various charitable organizations this year, only $1,000 would be eligible for a tax deduction. It is important to note that the 0.5% AGI floor applies to total contributions, not to each church or charity individually. This being said, strategies such as accelerating multiple years of giving through a Donor-Advised Fund can become even more valuable. By front-loading contributions into a single year, especially in years with higher income, donors can maximize their deductions while maintaining flexibility to distribute funds to charities over time, improving both tax efficiency and long-term giving outcomes.
