New on FinoLib · Volume II: Capital Markets
I have just published a new article on FinoLib, my free finance education library: Private Credit and Real Assets as an Asset Class Explained. It is part of Volume II: Capital Markets. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
8.5 Real Assets as an Asset Class
The idea in plain words
Real assets are things you can point to in the physical world: real estate, infrastructure and commodities. They earn income or price gains tied to the physical economy, and they can protect against inflation where contracts reprice with prices. How you hold them matters. US REITs must pay out 90% of their taxable income, and commodity futures returns depend on the roll yield as much as on the spot price.
Key points
■US REIT tests: 75% of assets and gross income from real estate, 90% payout, 100+ holders, five-or-fewer limit.
■The 20% section 199A deduction, made permanent in 2025, puts the top federal income tax rate on ordinary REIT dividends at 29.6%, or 33.4% with the 3.8% net investment income tax.
■Futures return = spot change + roll yield + collateral interest.
A closer look
Real assets — real estate, infrastructure (toll roads, airports, power grids, pipelines), and commodities — are tangible, physical assets valued partly for the income they generate and partly as a hedge against inflation, since their value and the income they produce (rents, tolls, commodity prices) tend to rise alongside the general price level, unlike a fixed nominal bond coupon. Institutional investors increasingly hold infrastructure specifically for its bond-like, contracted, inflation-linked cash flows combined with equity-like long-term return potential — a distinct risk-return profile from either pure fixed income or pure equities.
Decision rule
Before buying a commodity fund as an inflation hedge, read the futures curve: annualize the gap between the front and second contracts. If the curve is in contango by more than your expected spot price gain, the fund will lose money even if you are right about the commodity; prefer a fund that rolls into longer-dated or least-contango contracts, or own producers instead.
The costliest mistake
Buying a front-month commodity fund to “own” the commodity during a glut. With the curve in contango of 2% a month, the position loses 21.2% a year from the roll alone while the spot price is unchanged, and in April 2020 the front contract itself went to −$37.63. The roll yield, not the headline price, decides what a futures-based investor earns.
8.6 The Rise of Private Credit
The idea in plain words
Private credit is lending by investment funds, not banks, straight to companies, mostly mid-sized firms owned by private equity sponsors. The loans usually carry a floating rate: a market rate called SOFR plus a fixed extra margin. It grew to about $2.1 trillion by 2023 as banks stepped back. The main risks are whether borrowers can cover their interest when rates are high, interest paid in extra debt instead of cash (PIK), and funds that promise easy withdrawals while holding loans that are hard to sell.
Key points
■A unitranche replaces senior and junior debt with one loan at one blended rate.
■Example: SOFR 3.90% + 5.75% = 9.65%; coverage 2.07x falls to 1.72x if SOFR rises 2 points.
■A 98 issue price lifts the lender’s yield to 10.46% over three years.
A closer look
Private credit — non-bank lenders providing loans directly to companies, largely outside the traditional bank lending and public bond markets covered in Part 3: Fixed Income & Bond Mathematics — has grown into one of the largest structural shifts in finance since 2008. Post-crisis bank regulation (Basel III, introduced in Volume I’s Part 3) made certain categories of lending, particularly to smaller and mid-sized companies, meaningfully more capital-intensive and less attractive for traditional banks to hold on their own balance sheets — creating a funding gap that private credit funds, raising capital from institutional investors rather than depositors, have stepped in to fill.
Lenders raise money in closed-end funds locked for years or, increasingly, in evergreen vehicles such as non-traded business development companies (BDCs), which sell shares continuously and allow limited redemptions.
Decision rule
Underwrite at the stressed rate: if EBITDA ÷ interest falls below about 1.5x with SOFR 2 points higher and EBITDA 15% lower, the spread does not pay for the risk. In an evergreen fund, hold only money you can leave for two to three years. Treat a rising PIK share or repeated “amend and extend” deals as early default signals.
The costliest mistake
Treating a quarterly-redeemable private credit fund as a cash substitute. The loans live about four years and a 5% cap is a ceiling, not a promise: a $100,000 request returned $58,824 in the Golub quarter. The extra yield pays for exactly this illiquidity.
What the full article covers
In the full article I take you through these sections:
■8.5 Real Assets as an Asset Class
■8.6 The Rise of Private Credit
It includes worked examples, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Private Credit and Real Assets as an Asset Class Explained, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance