Ben Felix - The Problem With Private Credit

Short Summary

Main recommendation: Retail investors should be cautious about allocating to private credit funds, because the high yields and smooth returns are largely explained by hidden risk, high fees, and subjective valuations rather than by genuine excess returns. Ben Felix argues that once private credit is properly benchmarked and fees are accounted for, investors are not compensated for the risk they take, and that the product is often marketed as safe when it is not.

Key Points

• Private credit consists of non-publicly traded loans made by non-bank entities, such as private credit funds and business development companies (BDCs), to private businesses, often ones that cannot get bank loans.
• Reported returns look high and stable because private loans are not valued daily and lack a secondary market, so volatility and downside are muted in the reported figures.
• A 2023 paper ("Direct Lending Returns") found BDCs appeared to beat liquid benchmarks by 2.74 percentage points per year on net asset values, but on a market value basis (their trading prices, which often sit at a discount during stress) they did not outperform.
• A 2024 paper ("Risk-Adjusted Returns to Private Debt Funds") found a typical private debt fund's risk-adjusted excess return is statistically indistinguishable from zero once equity risk is included in the benchmark.
• Fund managers appear to have real skill, but the benefits are captured as fees (a typical fee structure is 1.5% plus a 15 to 20% performance fee, totaling roughly 3 to 4% all in), so end investors earn returns in line with the risk taken.
• Illiquidity and gating risks have shown up in Canada, including Romspen Investment Corp. cutting distributions and freezing redemptions, and Ninepoint Partners LP halting cash distributions and skipping a redemption window.

Details Worth Noting

• Concrete instructions: The video gives no step-by-step instructions, but its actionable guidance is to evaluate private credit by checking what risks are being taken and how they are compensated, to benchmark it properly (including equity exposure, not just fixed income), to use market prices rather than only reported net asset values when assessing performance, and to be sure you understand the fees, illiquidity, and redemption terms before investing.
• The Romspen and Ninepoint examples show that gating and distribution cuts can occur precisely when liquidity is most needed, so redemption terms matter.
• The video notes that loan terms are negotiated individually and can include structured equity features such as warrants, making private credit look more like equity than bonds.
• Ben Felix's concern is less that private credit funds lack skill and more that high-fee products are marketed to retail investors as safe and stable.
• These are the presenter's views and research interpretations, not professional investment advice.

Bottom Line

Private credit's appeal rests on smoothed returns and high fees that absorb the apparent premium, so retail investors should treat its stability and yield claims skeptically and check liquidity, fees, and benchmarks before allocating.