Family office investment: why I favor private credit

The market has finally met the part of the cycle that glossy fund decks tend to place in a footnote: borrowers do not remain “resilient” forever merely because the lender marks the loan quarterly.

And still, I favor private credit in a serious family office investment portfolio. Not blindly. Not because a manager offers a handsome 11% distribution and a dinner at a members’ club. I favor it because the traditional alternatives have become less convincing, and because a properly built private credit sleeve can still deliver something wealthy families genuinely need: contractual income, seniority in the capital structure, and leverage over terms that public markets often surrender for the privilege of daily liquidity.

The word doing the heavy lifting is “properly.” Private credit has attracted enough capital to produce the usual late-cycle hubris. Every lender is “selective.” Every portfolio is “granular.” Every covenant is “robust,” right up until the borrower misses its numbers, the sponsor runs out of fresh equity, and everyone discovers that the covenant package was more decorative than protective.

That does not make the asset class broken. It makes manager selection painfully real.

The strategic pivot is not a fad—it is a response to a broken bargain

Family offices increased their average private credit allocation to 4% in 2025, up from 3% in 2023. That may sound modest to outsiders accustomed to breathless headlines, but it tells a more meaningful story: private credit family offices are no longer treating the sector as an exotic satellite allocation. The share of family offices with no private credit exposure fell from 36% to 26% over the same period.

Capital is moving because the old bargain has deteriorated.

Public fixed income offers liquidity, yes. It also offers a crowded trade, thin control over documentation, and yields that can look acceptable until one accounts for inflation, taxes, and the inevitable compression in a falling-rate environment. Traditional private equity remains essential for many families, particularly those with operating-company DNA and patience measured in decades. But distributions have slowed. Assets can sit in portfolios longer than originally advertised. The paper gains remain paper. A family office cannot fund philanthropy, new ventures, real estate purchases, taxes, or the next generation’s ambitions with an unrealized multiple.

Private credit steps into that gap with an unromantic proposition: lend money, receive interest, sit ahead of equity, and negotiate terms before the capital leaves the building.

That proposition has appeal precisely because it is not glamorous. No one commissions a coffee-table book about a first-lien unitranche loan. Fine. The point of a family office asset allocation is not to entertain the family. It is to keep the family wealthy after the family patriarch’s favorite dealmaker has retired, the cycle has turned, and several supposedly permanent fortunes have learned the difference between enterprise value and cash.

The sentiment data make the case. More than half of family offices surveyed—51%—reported a positive outlook on private debt through 2025 and 2026. Their reasons were sensible: an illiquidity premium, lower correlation with other return sources, and a broader investment universe than the public bond market can offer.

None of those reasons means “easy money.” They mean the opportunity set is wider if one has the expertise to price it.

Private credit is not a bond substitute. It is a lending business wearing an institutional suit.

That distinction matters. A lender who understands the borrower, the collateral, the documentation, the sponsor incentives, and the refinancing calendar has an edge. A family office that merely buys a fund because the yield is high owns a locked box with a quarterly PDF.

I have watched investors confuse access with understanding before. In 2008, plenty of people owned credit risk without appreciating who sat in front of them in the capital structure—or who had quietly removed the exits. The packaging changes. The human behavior does not.

Yield is real. So is the refinancing wall.

Historically, private credit has offered steady yields in the 9% to 15% range. That range explains much of the enthusiasm. When a family office faces low distribution activity from private equity and sees public-market volatility turn every morning into an emotional event, a contractual income stream looks wonderfully civilized.

But yield never arrives alone. It travels with credit risk, liquidity risk, complexity risk, and—during a turn in the cycle—the awkward realization that some managers were being paid to manufacture loans, not to underwrite them.

Morgan Stanley expects yields on directly originated first-lien loans to bottom out in the 8.0% to 8.5% range during 2026. That remains elevated by historical standards. A first-lien position at that yield can be compelling, particularly when secured by a durable business with credible free cash flow and a sensible loan-to-value profile.

The question is not whether 8% to 8.5% is attractive in isolation. The question is what is being paid for it.

If a manager lends to a company with cyclical earnings, high leverage, aggressive add-backs, a looming maturity, and a sponsor whose follow-on equity is suddenly “under review,” that yield is not income. It is compensation for future administrative work.

The maturity profile deserves more attention than it receives at polite investment committees. Rated Business Development Companies face roughly $12.7 billion in maturities across 2026 and 2027, a 73% year-on-year increase. This is not a small technical detail tucked inside a credit report. It is a refinancing test for lenders, borrowers, and the investors who assumed a floating-rate loan book would simply roll itself forward.

Let me translate the issue: a borrower that survived on cheap financing may not survive on expensive financing. A lender who originated a loan at a generous valuation may not recover cleanly if that borrower needs fresh money. And a fund with cash tied up in amendments, extensions, and restructurings may have less capital available for the opportunities that actually deserve it.

This is why I do not dismiss private credit as conditions worsen. I become more selective. Distress does not eliminate opportunity; it separates underwriting from marketing.

A family office should want its credit managers to explain not only their base-case yield, but also the ugly mechanics: How many portfolio companies need refinancing in the next 24 months? What proportion of loans have payment-in-kind interest? Where have covenants been amended? Which investments have received sponsor support, and on what terms? How quickly can the manager deploy fresh capital if better opportunities emerge?

If those questions produce a performance monologue instead of a direct answer, leave.

The liquidity trap is not a bug. It is the price tag.

Private credit’s illiquidity premium is often presented as though it were free extra return for sophisticated people. This is charming. So is the idea that every private jet owner has a disciplined balance sheet.

The typical private credit fund comes with a five- to seven-year lock-up period. Some major players have capped redemptions at 5%. That means a family office can be entirely correct about the long-term appeal of the asset class and still be operationally wrong if it allocates capital needed for nearer-term obligations.

Liquidity planning is not a secondary exercise. It is the architecture of the investment.

A family office with concentrated operating-business wealth, expensive real estate commitments, philanthropic grants, tax liabilities, or a multi-generational distribution policy should map its private-market commitments against actual cash needs—not an aspirational spreadsheet built during a bull market. I have seen portfolios described as diversified when they were simply illiquid in several different fonts.

The practical distinction is simple:

1. Evergreen or semi-liquid vehicles can improve flexibility, but they do not abolish liquidity risk. A redemption feature is only as useful as the manager’s gate, the asset mix, and the behavior of other investors. A 5% cap becomes very real when everyone decides to request capital at once.

2. Drawdown funds offer clearer commitment mechanics but demand patience. They can suit family offices with predictable liquidity and a long runway, especially when the manager has genuine sourcing advantages. They are less suitable for capital that may be required to stabilize a family business or fund a large acquisition.

3. Separately managed accounts and direct co-investments offer control—but only to investors equipped to use it. Direct investing family office structures can negotiate terms, concentration limits, and collateral requirements. They also require real underwriting capacity. A wealthy family with one former banker and a heroic PowerPoint is not an institutional credit desk.

4. Liquidity should be matched at the total-portfolio level, not vehicle by vehicle. A credit fund may be rational on its own. It becomes irrational if it sits beside locked private equity funds, a development project, a concentrated equity position, and a lifestyle budget that assumes markets only go up.

The illiquidity premium is valuable only if you can afford to remain illiquid when everyone else wants the door.

This is where family offices can have an advantage over retail capital and over institutions tethered to quarterly behavior. A well-governed family can tolerate complexity and hold through noise. But patience is not the same thing as captivity. The former is a strategy. The latter is a failure of cash management.

Rising defaults have changed the job description

The 6.0% private credit default rate in April 2026 is the figure that should sober up anyone still referring to the market as a smooth-income machine. Defaults do not necessarily destroy the case for private credit. They do destroy lazy versions of it.

A default rate is not a loss rate. Senior lenders may recover capital, restructure loans, receive additional economics, or take control of assets. But recovery depends on the loan documents, the collateral, the lender group, the value of the underlying business, and the willingness of sponsors to inject more equity. That is a great deal of conditionality for anyone who bought the fund based on a headline yield.

The credit books I want to own now have several traits:

• True first-lien seniority, not a cleverly labeled position that becomes structurally subordinated by operating-company debt, preferred equity, or loose baskets in the documentation.
• Businesses with recurring cash flow and defensible customer demand, rather than issuers whose earnings rely on flawless execution, aggressive acquisition assumptions, or a friendly capital market.
• Moderate leverage measured against conservative earnings, not adjusted EBITDA inflated by hypothetical savings and management optimism. The latter is not a metric. It is fiction with commas.
• Covenants that create intervention rights early enough to matter. A lender does not need to run the company, but it needs the ability to stop value leakage before the borrower arrives at insolvency court wearing a brave face.
• A manager that has handled workouts. Credit cycles expose the difference between lenders and originators. One knows how to protect capital; the other knows how to deploy it.

I am not allergic to a loan that gets amended. Amendments happen. Good lenders sometimes extend maturities, inject rescue capital, or accept temporary payment-in-kind interest because preserving enterprise value serves everyone better than forcing a fire sale.

But a portfolio filled with repeated amendments deserves scrutiny. It may reflect thoughtful stewardship. It may also reflect a manager postponing recognition. Both can look remarkably similar in a quarterly letter.

Family office investment trends often get discussed through allocation percentages. That is the comfortable part. The harder question is whether the office has the governance to challenge a manager when performance begins to blur. A family investment committee should insist on vintage-level transparency, exposure by sector, leverage metrics, watchlist names, realized versus unrealized losses, and the manager’s record of covenant enforcement.

No, this is not being fussy. This is what lending is.

I would rather own the complexity than overpay for the obvious

Among private debt strategies, family offices show the strongest preference for opportunistic and special situations debt, with 62% positive support in one survey, ahead of direct lending at 53%. That ordering makes sense to me.

Direct lending has become crowded. It remains useful, particularly through managers with proprietary sourcing, strong sponsor relationships, and proven discipline. But competition has compressed spreads in the cleanest deals and encouraged some lenders to stretch on structure. There is no shortage of capital chasing the same sponsor-backed middle-market borrower. The friction is obvious, even if the marketing materials prefer not to mention it.

Special situations, by contrast, can reward expertise where capital is scarcer and decisions are harder. Refinancing gaps, asset-backed rescue financing, complex corporate carve-outs, secondary loan purchases, and situations where a borrower needs speed rather than a polished auction process can all create pricing power for lenders.

This is not a call to load up on distressed debt because the word “opportunistic” sounds clever at a dinner party. Complexity can conceal landmines as efficiently as it creates returns. The distinction lies in whether the manager possesses genuine restructuring capability, industry knowledge, and the legal muscle to enforce its position.

I would typically prefer a diversified approach:

The allocation should not be dictated by a market forecast. Forecasting is a fine profession for people who enjoy revising their forecasts. It should reflect the family’s liquidity, risk tolerance, tax situation, existing private-market exposure, and appetite for manager complexity.

A family with heavy private equity exposure may need private credit primarily for current income and capital-structure seniority. A family that sold an operating company and holds substantial liquid assets may have more room to pursue special situations through a specialist manager. A family with a real estate empire already exposed to refinancing risk should think twice before adding credit strategies tied to the same economic vulnerabilities. Diversification is not achieved by buying different products that all panic at the same time.

The private-credit trade is maturing, which is precisely why it is becoming interesting

For years, private credit benefited from a favorable narrative: banks retreated, borrowers needed capital, rates rose, and private lenders collected floating coupons. Neat. Lucrative. Perhaps too neat.

Now comes the less photogenic phase: defaults, refinancing pressure, liquidity constraints, manager dispersion, and a reckoning over documentation. This is not a reason for a family office to flee. It is a reason to stop behaving as though private credit were a single asset class with a single risk profile.

The strongest family offices will not ask, “What yield can we get?” They will ask, “What are we lending against, what protects us if the thesis fails, and can we live without this capital for longer than expected?”

That is the proper frame for private credit in 2026. It can provide attractive contractual income and genuine diversification. It can also lock capital into mediocre loans underwritten at the top of a forgiving cycle. Both statements are true, which irritates people who prefer investment theses with fewer moving parts.

I still favor private credit—but I favor the lender with scars, covenants, patience, and enough skepticism to know that a double-digit yield is never just a yield.