Independent financial advisors will be increasing their allocations to private credit, and some are steering away from traditional asset classes to do it, according to a recent survey conducted by Crystal Capital Partners, an alternative investment platform.

The Miami-based firm surveyed more than 50 of the independent advisors who use its platform and found that more than 60% will increase their exposure to private credit this year.

Moreover, of those who plan to increase their allocation, more than 5% said they would reallocate it from another alternative asset class while 35% said they would be allocating new money to increase that allocation.

“Private credit funds are providing distributable income to investors, often quarterly, by generating yield on originated loans,” said Alan Strauss, senior partner and director of investor relations at Crystal Capital. “As long as they continue to do so at a very attractive rate ... there’s a deserved place within a high-net-worth client's portfolio.” 

There’s been persistent volatility in public fixed-income markets since late 2020, which means advisors might be looking to alternative forms of distributable income, according to Strauss. 

The survey found that of those who are increasing their allocation, 35% said they plan to allocate up to 10% of their clients’ portfolios from public fixed income to private credit.

In addition, more than 15% plan to reallocate up to 25% from public fixed income, while less than 5% are going to reallocate 50% or more from public fixed income, the survey found.

The most popular sub-topic of private credit was direct lending, which 50% listed as their top interest while more than 25% said it was real estate debt and more than 20% said both mezzanine debt and special situations. 

Other areas that garnered interest were distressed debt, infrastructure debt and venture debt, while more than 40% of those surveyed said they did not have a preference.

Some advisors were apprehensive about increasing their allocation to private credit. The study probed into those reasons and found that of those who said they are not planning to increase their allocation, 70% said it was because of a perceived higher risk in the asset class.

In addition, more than 45% said it was because of client preference while almost 40% said it was because they were not familiar with private credit. 

Education can help better inform advisors and their clients about the allocation and address any misconceptions that might exist about it, Strauss explained.

“I think the education component is critical because there are so many misnomers and misconceptions in this generally opaque industry,” he said. “It’s important for advisors to understand what those are and that there are solutions that really help them address them and eliminate any pain points.”

Strauss believes the study shows that private credit is ready to grow significantly as an asset class but warned that advisors will need to increase due diligence on the products they invest in.

“The growth of private credit and its success is only going to lead to more asset managers proliferating the product line,” he said. “Because of the product proliferation, it’s even more important today that advisors have a really discerning eye and are highly selective of the products that they work with.”