Private credit in a balanced portfolio: sizing and due diligence
How we size private credit allocations against liquidity needs, and the due diligence questions we ask before adding a manager.
Private credit has moved from a niche allocation to a staple of diversified portfolios. The question for most clients is no longer whether to hold it, but how much, and on what terms.
Sizing
We size private credit against two constraints: the client’s liquidity timeline, and the volatility budget of the profile. A typical Balanced profile holds 5 to 10 percent in private credit, funded from the public fixed income sleeve. The Growth profile holds 8 to 12 percent, funded from a mix of fixed income and real assets.
The liquidity constraint comes first. Private credit commitments are called over three to five years and returned over five to seven. A client needs to be confident they will not need to sell the position to meet a liquidity need.
Due diligence
Before adding a manager, we ask four questions:
- Underwriting. Who originates the loans, and what is their track record across a full cycle?
- Security. Where in the capital structure does the strategy sit, and what is the collateral?
- Alignment. Does the manager invest their own capital alongside the fund?
- Reporting. How quickly are marks updated, and how transparent is the underlying portfolio?
A manager that cannot answer all four with documented evidence does not enter the portfolio.
What we watch
The risk in private credit is not default in any single loan — it is the correlation of defaults across the portfolio in a downturn. We monitor vintage diversification and sector concentration, and we re-underwrite positions when managers raise new funds.
For information only. Not investment advice. Past performance is not a reliable guide to future returns.