SEI CIO says private credit is ‘not as compelling’ anymore

Jim Smigiel, chief investment officer at SEI, describes himself as the curmudgeon in the room who is pouring cold water on the party in the booming private credit sector.

Smigiel admits he’s getting a reputation as being “super negative” on private credit but said that’s not really his outlook. Private credit is an asset class that has served investors well, he said. But Smigiel sees other options that are more attractive from a risk and liquidity perspective.

“Today, it's just not as compelling,” he says from his perch at a total portfolio level that involves asset allocation as well as allocating a client’s fee budget and illiquidity budget.

Smigiel oversees traditional and alternative investments offerings. SEI had approximately $432 billion in assets under management and approximately $943 billion in assets under administration, both as of Dec. 31.

Investors looking at private credit need to think through questions around how long they want to lock up capital, if they want to take on “a significant lack of transparency” as well as concentration risk and the issue of dry power, he said.

“Starting from scratch today, which a lot of people are, your 10% allocation is going to take you years to get allocated to,” he said. “I can mimic those exact same returns, low teens, mid-teens, in some cases, high teens, in something like the CLO market that is very, very diversified from an individual loan perspective, that is actively managed during the launch and reinvestment period of time.”

Smigiel admits he has a horse in the race. SEI’s structured credit business launched a CLO equity hedge fund in 2007 that is managing approximately $1.7 billion.

The private credit market has seen rapid growth over the past decade and assets under management now stand at nearly $1.7 trillion, according to Preqin data as of June 2023. That’s up from only $435 billion at the end of 2013.

And investors who allocated to private credit some time ago are likely happy, Smigiel said. But as the space continues to grow, he said lending standards can potentially start getting diluted and take a backseat.

“Right now, we are not allocating to private credit,” he said. “We have in the past. So, we're definitely familiar with the asset class. We have our clients who are invested in private credit. It's just that from the starting point today, that's not something we'll be allocating to.”

With private credit garnering so many headlines, there will be more regulatory scrutiny on the space moving forward, Smigiel predicts.

“It certainly isn't lost on the SEC that there’s some pricing discrepancies between a direct lending of the same exact corporate entity in one vehicle vs. another,” he said. “These things are going to have to catch up in the private space.”

And he expects that scrutiny to happen no matter who is leading the Securities and Exchange Commission following the November election.

Smigiel says it does feel like some “branding” is taking place making private credit feel new and interesting to catch investor attention. He points to conversations with credit managers in the hedge fund space and long-only space who are discussing getting into private credit.

“All of the boxes are being checked that we are late cycle in private credit,” he said.

Smigiel says he is just observing the market and pointing out what he thinks are better alternatives.

“Dare I say, I think you'll be hearing more of the likes of me throughout 2024, I would bet,” he said.