Private Credit Today

October 31, 2023 |
4 minute read

On September 27th, Commonfund OCIO hosted an event in Minneapolis at the O’Shaughnessy Distilling Co. Following a tour and tasting at the facility, Nicole Melwood, Director, and Vincent Kravec, Managing Director, Head of Fixed Income and Private Credit led a conversation around the Private Credit landscape. 

1. What is Private Credit and why do we find it interesting? 

Private Credit from our perspective is a “big tent” that encompasses many alternative credit strategies. The sub-strategy of Private Credit that has seen the most focus in recent years is senior lending. This segment of the market has non-bank lenders providing loans to companies, in many cases owned by private equity sponsors, which are floating rate in nature, not traded on public markets like high yield bonds or broadly syndicated loans, and which are typically held to maturity by the lender. As some like to say, it’s a “storage business” not a “moving business.” Aside from senior lending, investors can also find private credit strategies that focus on lending to stressed or distressed borrowers, hybrid strategies that pivot between private lending and public credit markets depending on the relative attractiveness of the opportunity set, and many others.
At Commonfund, we find private credit interesting, in part because we can tap into the expertise of managers that have long experience in the market, and the wisdom and skill that come along with that experience. We work with managers that have weathered volatile and challenging environments like the COVID dislocation, the 2015/2016 energy sell-off, the U.S. ratings downgrade (2011) and the Great Financial Crisis. Focusing on managers with a robust track record allows us to assess that track record, observe how the loans they have made and the lender protections they have obtained have withstood challenging environments. In the current environment, we want to see managers with deep workout skills, the infrastructure to manage challenged assets, and the capabilities to drive improved outcomes.

2. What role can private credit play in portfolios? 

Private Credit can achieve several objectives in a portfolio:

  • It can provide shorter duration access to the liquidity premium typically available to investors in private strategies. The liquidity premium can be additional compensation earned by investors willing to forego access to their capital for extended periods of time.
  • It can offer exposure to floating rate lending strategies which can be beneficial in a rising rate environment.
  • In addition, it can potentially grant access to better underwriting outcomes relative to liquid credit in the event borrowers become challenged.

Depending on the sub-strategy, Private Credit can provide meaningful diversification, correlation benefits, and optionality to add value in various market backdrops.

3. Talk to interesting subsectors within private credit that we may consider i.e., music royalties; aviation leasing

Commonfund believes strongly in the benefits of diversification, and while exposure to floating rate strategies can provide a tailwind in a Fed tightening cycle to combat higher inflation, we wanted to find other ways to bring additional inflation protection characteristics into the private credit portfolio. We implemented aviation leasing as part of this effort. This has been compelling for several reasons including: the impact on the residual value of aircraft with higher input prices (raw materials and labor), the duopolistic nature of the industry (Boeing and Airbus) with significant visibility around production schedules, the exposure to quality counterparties on the leases, and the exposure to early-life narrow-body aircraft that are more energy efficient and less likely to be “parked” in a recession.

Music royalties is also a sector we like, and while we do have some indirect exposure to this strategy through a multi-strategy asset-based finance commitment, we don’t yet have a dedicated allocation. It is an interesting sector from the perspective of the predictability of cash flows and how these exposures can impact and provide diversification benefits to a credit portfolio. However, it does have some sensitivity to rates as ultimately it is a discounting exercise of future cash flows.

Pictured left to right: Godson Sowah, Twin Cities Habitat for Humanity, Kevin Myren, American Academy of Neurology, Carolyn Van Nelson, Women's Foundation of Minnesota, Nicole Melwood, Director Commonfund OCIO and Vincent Kravec, Managing Director Commonfund OCIO.

4. What are some of the conversations you are having around private credit?

Despite the “denominator effect” and its impact on investors’ ability and willingness to make commitments in private markets, we are seeing a high degree of interest in private credit. In part this is from investors who are staying “on-schedule” with their private credit commitments. It is a difficult proposition to sit out the 2023 – 2024 vintages, which some suggest could be the best vintages for private credit funds of the last ten and next ten years, because of denominator effect issues. In speaking with market participants, we are hearing investors reducing, to a degree, their private equity or venture capital commitments in favor of maintaining their private credit commitments. Aside from those adjustments, we’re also seeing investors seeking to increase their exposure to private credit above previous targets, as well as new entrants coming to the space at what feels to be a very opportune time.

5. The Twin Cities is a special place. Each conversation that we have had here has been around impact and/or DEI. Will you first speak to impact? While impact is broadly defined, will you give an example(s) of how private credit has also been categorized as impact investing. 

We are constantly talking to market participants, and we do see private credit strategies that focus on impact. That said, we focus on putting together well-diversified Private Credit portfolios that seek to achieve our return objective. From an implementation perspective, we believe we need to find “impact” programs that solve for all of these: risk/return/impact. The risk end of it can be particularly challenging. For example, if we were to commit to a lending strategy focused on solar, we need to consider: “What is our “look-through” exposure to geopolitical risk? Where are the raw materials sourced? Would the equity you are lending to be negatively impacted by elevated trade barriers or trade embargoes between China and the Western world? If the strategy benefits from government subsidies, is there a risk that if those subsidies are discontinued, and that the strategy will no longer achieve its objective?” When we consider local impact, we maintain our focus on lender protections: “How comfortable is a manager foreclosing on the borrower in the event of default?” This can be a difficult proposition from a social perspective at the local level. Other considerations include: “How tight are the loan covenants? What is the track record in the event of a covenant breach? What is the historical recovery given default?” When speaking of par lending strategies, getting back par + accrued interest generally gets you the “market” return, and maximizing outcomes in a credit cycle is a key driver of alpha.

6. Similarly, can you speak to diverse managers that you have “diligenced” and those in the portfolio? 

We have been actively building a database of diverse managers since 2016. We cast a wide net and have many conversations, relying on Commonfund relationships, conferences, panel participation, reverse inquiry, outbound proprietary research, and databases, and today, in our most recently fully-committed closed-end private credit fund, more than 16 percent of manager commitments are diverse. Importantly, we believe this is an outcome of having many conversations with market participants as we seek to assemble a diversified portfolio of strategies that we believe can achieve our risk/return goals and isn’t a result of us targeting a particular diverse outcome. 

Commonfund OCIO is on the road meeting with institutions to discuss the topics above and more each year. Interested in being a part of the conversation? If you are interested in attending a regional roundtable in your area, please complete the form with your details. A member of our team will reach out to you with dates and locations of where we will be next. 


Nicole Melwood


Nicole Melwood


Vincent Kravec


Vincent Kravec

Managing Director

Stay connected with the Insights Blog

Popular Blog Posts

Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Governance And Policy | Insights Blog

Endowment Management and the Three Primary Responsibilities of a Board

The fourth blog in the “Six Ps of Investment Stewardship” series addresses People, specifically how boards function within an organization. To learn more about the first four principles in the series...


Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.