Franklin Templeton (BEN) CEO Jenny Johnson said the private credit sector has earned its rightful place on Wall Street.
“Private credit [is] here to stay,” Johnson told Yahoo Finance during the Semafor World Economic Summit. She tethered her argument to the 2008 financial crisis, when tightened capital requirements forced banks to stop lending, prompting private funds to fill the gap.
“It drives me nuts when anybody says, ‘Oh, it’s more liquid than you think.’ It is absolutely illiquid. And if you cannot withstand the illiquidity of the investment, don’t get in it. OK?” she said.
As the underlying loans cannot be sold quickly like a stock, investors can’t get their cash back on demand from the private funds. But Johnson pointed out that investment-grade private loans can yield an extra 150 basis points over traditional bonds. On the high-yield side, that spread can jump to 250 or even 400 basis points.
Over a 20-year timeline, just a 1% additional return could lead to a 20% higher retirement balance. Johnson suggests investors ask themselves if they could withstand 5% to 10% illiquidity in their portfolios. “If you can, you’re going to be able to capture a nice premium that can be meaningful when compounded. So you shouldn’t ignore it,” she said.
Johnson noted that firms like Franklin Templeton are now embedding those frozen assets into “liquid vehicles.” This means they mix a small amount of private debt into a traditional fund that people can trade quarterly. It gives retail investors a taste of high-interest private debt and late-stage venture capital without the usual decade-long wait to get their money back.
Johnson also pointed to artificial intelligence and enterprise software as the next frontier, a contrarian view on Wall Street. Software stocks have been pounded because of fears that rapid AI advances will make traditional software obsolete. Part of the concerns surrounding private credit has also been their lending to software firms.
In the backdrop of the Iran war, skeptics also argue that software matters much less than physical security and oil.
Other titans are watching. Goldman Sachs CEO David Solomon noted that the firm is currently seeing loan stress in big business “wholesale” lending, rather than in its private credit or credit card portfolios.
He warned that the market has gone a “long period of time without what I call a normal credit cycle,” meaning a recession is overdue. Once a real slowdown hits, higher loss levels across all diversified portfolios are inevitable, he said.
finance.yahoo.com
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