Alternative Credit Strategies for Portfolio Diversification

Why Venture Debt Is Becoming a Core Allocation in Private Credit Portfolios In today’s market, institutional investors are seeking income, protection, and uncorrelated alpha. That’s why venture debt/growth credit is gaining serious traction. As a senior secured, cash-yielding strategy with equity-style upside, venture debt offers a rare combination: ✔️ Mid-Teens Yield – Consistent cash income from interest and structured fees ✔️ Asymmetric Upside – Equity kickers deliver meaningful returns without equity-level risk ✔️ Downside Protection – Senior secured claims, collateral, and strong covenant packages ✔️ True Diversification – Low correlation to public markets and traditional fixed income Over the past 20 months, I’ve published a monthly series in Venture Capital Journal designed to help institutional investors evaluate and capitalize on this high-performing credit strategy. 📎 Attached: Full PDF compilation of all 20 articles Topics include company and industry analysis, deal sourcing, structuring, diligence, sponsor evaluation, portfolio construction, risk management, and more. If you’re building a private credit portfolio designed for yield, protection, and asymmetric upside, this resource is worth your time. 📬 DM me to discuss how we apply these principles at Applied Real Intelligence LLC ("A.R.I."). #VentureDebt #PrivateCredit #GrowthCredit #InstitutionalInvesting #AlternativeInvestments #ZackEllison #VCJ #AppliedRealIntelligence #Endowments #Pensions #FamilyOffices #CapitalPreservation #SeniorSecured #Income #Investing #WealthManagement #CIO

Debt & Equity = Balance (true for the public market & true in the private market) WSJ reported that Private Equity funds face mounting/prolonged exits. In contrast, private credit offers a more deterministic return profile given contractual coupon payments, with amortization, and defined maturity dates, which delivers relatively consistent DPI (Distributions to Paid-In), IRR and MOIC calculations. Top-quartile PE managers will distinguish themselves from the crowd as they will deliver strong returns that is truly value-added. Those who are not performing as well will seek extensions, multi-asset continuation vehicles, and fee drag until the “frozen M&A environment” re-opens. The WSJ article highlights $668B stuck in aging PE funds (some now lasting 15 years), whereas direct lenders can pay dividends, recycle capital, or return the capital to their investors as loans mature or prepay. The efficiency and more predictable cash flows of Private Credit is crucial for LPs managing duration and liquidity. PE investors (including pensions and insurance companies) are re-allocating a portion of their alternative investment portfolio towards private credit due this predictable cash flows, lower volatility, and shorter duration. The critical point to realize is that Private Equity and Private Credit work together, it is the perfect balance to optimize your diversified portfolio: Private Equity provides upside through capital appreciation and operational value creation, while Private Credit delivers steady income, downside protection, and predictable cash flows. Together, they complement each other—equity drives growth, credit provides stability—creating a resilient, all-weather private markets allocation for institutional investors. Manager selection is critical in private markets, as top-quartile managers consistently drive most of the value creation. In both private equity and credit, dispersion is wide—making access to proven managers the key determinant of returns.

Oaktree Capital Management, L.P.'s Christopher Gray put it plainly: asset-backed finance is no longer a niche corner of private credit. It’s a growing universe with its own rules, risks, and opportunities. Here's what stood out to me in his breakdown of Oaktree’s ABF approach: 1. 𝗖𝗼𝗻𝘀𝘂𝗺𝗲𝗿 𝗹𝗲𝗻𝗱𝗶𝗻𝗴 𝗿𝗲𝗾𝘂𝗶𝗿𝗲𝘀 𝗻𝘂𝗮𝗻𝗰𝗲. From cell phones to auto loans to mortgages, no two asset pools are the same. Gray noted that you can’t lean on headlines, understanding originator incentives and borrower priorities is key. 2. 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲𝘀 𝗺𝗮𝘁𝘁𝗲𝗿 𝗮𝘀 𝗺𝘂𝗰𝗵 𝗮𝘀 𝗮𝘀𝘀𝗲𝘁𝘀. Oaktree underwrites downside scenarios and negotiates protections that public ABS markets rarely allow. Their ability to tailor terms directly with originators is a powerful differentiator. 3. 𝗧𝗵𝗲 𝘀𝗰𝗼𝗽𝗲 𝗶𝘀 𝘃𝗮𝘀𝘁. Beyond consumer loans, Oaktree is financing essential equipment, aircraft, digital infrastructure, and even royalties. ABF offers a spread premium, compensating investors for the bespoke nature and complexity of its products. In a market where banks are retrenching and demand for alternative financing continues to expand, ABF highlights how creativity and scale can unlock capital for assets that underpin both households and industries. That requires not only capital, but teams capable of balancing data with judgment, structuring with discipline, and execution with speed. Source: https://lnkd.in/ebGVYFDv

Residential. An ever competitive fight for volume and a smaller pie to fight over in the face of higher rates. Add private credit to the discussion. "Private lenders are looking for ways to expand their reach into other parts of the economy, as the traditional direct lending market has become crowded. One path is asset-based finance, which can encompass everything from auto loans and credit card debt to mortgages."   "The residential market is ripe for the taking, as alternative asset managers can finance home loans that can’t be tied to Fannie Mae or Freddie Mac" "While banks have traditionally provided these loans (HELOCs), the regional banking crisis in 2023 has given private credit firms an opening. These funds can finance these loans and then repackage them into bonds of varying risk and sell them to investors such as insurers. There’s investor interest in residential mortgage bonds, with sales up more than 30% so far this year, according to data compiled by Bloomberg." "TPG Angelo Gordon has estimated home equity loans and lines of credit could be a $2 trillion market. The outstanding volume of such products rose by $9 billion to hit $400 billion in the fourth quarter of 2024, according to data from the Federal Reserve Bank of New York" "Private credit firms have also looked beyond home equity lines to take up market share broadly. Brookfield Asset Management Ltd., for example, has agreed to buy a majority stake in Angel Oak Companies, a mortgage lender and investor that manages over $18 billion." "A robust housing market, the retrenchment of banks and the boom in residential mortgage bonds altogether presents an opening for asset managers “to generate double-digit returns in the sector" https://lnkd.in/en3d8s_v