Mark Higgins, CFA: Private Credit, Caution, and the Lessons of Financial History

Summary

Enterprising Investor: Mark Higgins, CFA – Private Credit, Caution, and the Lessons of Financial History

Release Date: June 1, 2025
Host: Laura Moberg (Guest: Mark Higgins, CFA)
Recorded At: CFA Institute Annual Conference

Introduction

In this insightful episode of the Enterprising Investor, Laura Moberg engages in a compelling discussion with Mark Higgins, CFA, a seasoned financial historian and Senior Vice President at IFA Institutional. Recorded live at the CFA Institute Annual Conference, the conversation delves deep into the nuances of private credit, the cyclical nature of alternative asset classes, and the critical lessons gleaned from financial history.

Mark Higgins: Background and Expertise

Laura begins by introducing Mark Higgins, highlighting his extensive experience of over 14 years in advising both small and multibillion-dollar plans. Mark is not only a respected advisor but also a financial historian with a popular book titled Investing in US Financial: Understanding the Past to Forecast the Future. His role on the Museum of Finance American Finance Editorial Board further cements his authority in offering a historical perspective to current financial practices.

“The more you extend your memory by essentially absorbing the memories of our predecessors, the more you see the same things happen over and over again.” — Mark Higgins [02:04]

The Current State of Private Credit

Mark provides a cautious outlook on the burgeoning private credit sector. He draws parallels between the current surge in private credit investments and previous surges seen in venture capital during the 1980s and 1990s, buyout funds, hedge funds in the late 1990s, and even whale investments in the late 1800s.

“The asset flows into private credit have accelerated substantially, which is consistent with what we saw with other alternative asset classes.” — Mark Higgins [02:24]

He emphasizes that while there are opportunities within private credit, the sector is currently in a late phase of its investment cycle, characterized by excessive capital chasing limited high-quality opportunities. This environment increases the risk of downturns, making it imperative for investors to exercise heightened caution.

“If you just bluntly allocate to private credit and rely on generic recommendations, it's probably not a good time to get in.” — Mark Higgins [02:52]

The Cycle of Alternative Asset Classes

Mark elaborates on the cyclical nature of alternative asset classes, explaining that each surge typically follows a similar pattern: an initial legitimate market void fills up as early adopters flood the space, often leading to over-allocation and diminishing returns.

“We are in a late phase of that cycle that we've seen before. It's not average is not going to be acceptable. You need to be consistently top quartile.” — Mark Higgins [04:09]

He warns against complacency, noting that many investors mistakenly believe being "average" is sufficient in such saturated markets. Instead, only those with exceptional skill and performance can sustainably add value.

The Role and Skepticism of Consultants

A significant portion of the discussion centers on the influence of consultants in the investment management industry. Mark expresses skepticism about the expanding role of consulting firms, arguing that their recommendations often lead to over-diversification and investment in overpriced asset classes without sufficient expertise.

“The largest 10 consulting firms have literally tens of trillions under advisement. It's not mathematically possible for them to add value in aggregate if they have tens of trillion dollars.” — Mark Higgins [07:07]

He criticizes the reliance on consultants who may base their advice on short-term performance metrics, which can be misleading and fail to account for the long-term sustainability of investment strategies.

Historical Lessons and Modern Portfolio Theory

Drawing from his expertise as a financial historian, Mark discusses the pitfalls of Modern Portfolio Theory (MPT) when misapplied. He points out that many institutions rely on unreliable assumptions and overcomplicate their portfolios without the necessary skill to manage alternative asset classes effectively.

“If you're going to enter the space because someone just tells you to allocate to it based on an assumption, that is not enough.” — Mark Higgins [14:00]

Mark advocates for a more diligent approach, emphasizing the importance of track records and thorough due diligence over purely model-driven investment decisions.

Looking Forward: The Future of Private Credit

Mark anticipates that the private credit market will continue to face challenges due to the oversupply of capital and the scarcity of high-quality investment opportunities. He advises investors to remain cautious, focus on skillful management, and avoid following trends blindly to navigate the evolving landscape successfully.

“Private credit is squarely there, it's not average is not going to be acceptable. You need to be consistently top quartile.” — Mark Higgins [06:02]

Conclusion

The episode wraps up with Mark expressing optimism that the discussions at the conference, including contrasting views on private credit, will lead to more informed and prudent investment decisions among professionals. His balanced perspective underscores the importance of learning from financial history to avoid repeating past mistakes.

“Everyone benefited from that session from hearing from an asset manager who is more bullish on this sector and somebody who's skeptical. They'll make a better decision because they heard both sides.” — Mark Higgins [16:03]

Final Thoughts

Mark Higgins offers a thought-provoking analysis of the private credit market, grounded in historical context and a critical examination of current investment practices. His insights serve as a valuable guide for investment professionals navigating the complexities of alternative asset classes in an increasingly crowded market.

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Transcript

[A]

Foreign welcome to the Enterprising Investor, the flagship podcast for the CFA Institute. My name is Laura Moberg and I am sitting in today for Mike Wahlberg and we are actually talking to you live from the CFA Institute annual conference today. With me is Mark Higgins. Welcome Mark.

[B]

Thank you. Thank you for having me. Lada.

[A]

We had a panel today on a private credit where Mark was talking and was very well attended and very well appreciated. This was recorded for the Financial Thought Exchange. This is the podcast for the CFA Institute Research Foundation. That is where you normally will find me. So if you want more content from me and my colleague and friend Larry Sego, check us out at the Financial thought exchange on YouTube and everywhere else where you listen to podcasts. So I thought we should talk a little bit today about you and also the content of today's panel and other things that people might want to hear about private credit here. So just first as a short introduction, Mark Higgins is a senior vice president for IFA Institutional where he provides advisory services to a variety of large institutions and select high net worth individuals. He has more than 14 years of experience advising both small and multibillion plans. As a financial historian, Mark has actually written a book which is very popular here at the conference. Actually it is called Investing in US Financial Understanding the Past to Forecast the Future. So you can rewind that now and write it down as well as his name, Mark Higgins, and you'll find it anywhere that you would buy a book. He has also served. He also serves as a member of the Museum of Finance American Finance Editorial board. So very much the financial historian provides a different perspective where we are in.

[B]

It does it provides a valuable perspective because the more you extend your memory by essentially absorbing the memories of our predecessors, the more you see the same things happen over and over again. And private credit is different in some ways, but in a lot of ways it's following the same trajectory as we've seen with other alternative asset classes.

[A]

Yeah, we're definitely. It's the interest of anyone in finance. Right. You're not repeat the mistakes in the past and not, not always having to make the same mistakes in the past. So we had the panel. Your remarks are very appreciated and maybe a little bit surprising because I think that people took them to be a little bit, if not negative but skeptical on the, on the sector. So what would you say would be the main things that you hope that people in the panel took away from the remarks?

[B]

You know, I mean this is something you definitely see in history is the most successful investors are Skeptical that you have to be because one mistake can, can really pretty much ruin a lot of things that you get. Right. And so, you know, I wasn't, I was negative in the sense that if you look at the asset flows into private credit, I mean, they have accelerated substantially. And that is consistent with what we saw with venture capital in the 1980s and 1990s after they had a fantastic period of performance. Same with buyout funds, same with hedge funds in the late 1990s. We saw it with whaling in the late 1800s. So the main message here is just like any asset class, I'm sure there are opportunities, but just, it's not a free lunch. And if you just bluntly allocate to private credit and, you know, just rely on, you know, pretty generic recommendations from consultants and staff, it's probably not a good time to get it in. There's, there's a very good likelihood, in my opinion, that it's, it's a bad time to get in.

[A]

And I think it's an important point that you made that it's a little bit of a strawman to say that you claim that it's a bubble. And if you can argue against that it's a bubble, it's all fine. Like, that's not what you're saying. You're saying it's a cycle.

[B]

Yeah, yeah. And you're in a late phase of a cycle that we've seen before. And I believe we're in a late phase of that, of a cycle that we've seen before. And that's the time when it's not enough to be average. You have to be much better than average. And there, I've seen, I've definitely seen this repeatedly in history too, is there's a tendency for people to be overly confident that they're automatically way above average when they're not. And so my, my message was really, if there's a screw on, intensifying your caution, turn the screw right now because it is time to be very cautious. Yeah.

[A]

Would people have a tendency to think that they're above average more likely in a sector like this than in the, in public markets? What I'm thinking about is we all know that public equities and public bond is something that's been around for a long time. So, you know, you have to be top notch. And people still think of private space as something where you can come in as kind of from the sideline and take some shortcuts.

[B]

I think it's less about them thinking that they're over they're above average and more about them thinking that it's okay to be average. That you know, they're getting a lot of the large public pension plans, endowments now it's getting into private wealth. They're allocating to these based on like an average return assumption. And if once a history shows that once an asset class becomes flooded with capital and I would argue private credit is squarely there, it's not average is not going to be acceptable. You need to be consistently call it roughly, I mean there's no exact metric, but call it roughly consistently top quartile. And if you're not, you shouldn't be there. And that, that's, it's, it's, it's less about are you better than average? Well, it is about it in the sense that you shouldn't be in it unless you're way above average. But it's less about people over being overly confident and just not even thinking that it's necessary is what I see more often now.

[A]

It is a pretty broad universe. Are there pockets where there would be opportunities? You know we on the panel, we, we slice and dice a little bit. You know the other speaker did about mid market smaller companies and all that like, and maybe specific sectors like are there still opportunities out there or is it best to analyze this as more the.

[B]

Yeah, I mean I'm sure and that's, that's where I, I think people were think were thinking I was overly negative. I'm sure there are just like there are in venture capital if you're in a top venture capital firm. It's just that the, on average, you know, it's not in, in my opinion, on average it's not a good opportunity. But if you're highly skilled, you can maintain that skill for a long time like Yale University and what they have done over the past 40 years. Yeah, I'm sure there are opportunities. It's just that it's hard, it's harder than people think.

[A]

Right.

[B]

Yeah.

[A]

And you talk also about, you touched on a little bit. Maybe we can talk a little bit more about the role of consultants in this world. You seem to be quite skeptical of their way of doing things. Maybe you can elaborate a little bit.

[B]

You know the issue and I wrote about this in a paper with the CFA with the enterprise investors probably about a year ago, I guess maybe, maybe a little less than a year ago. And you know, the pro. So if you understand the history of consultants, you can kind of see how this happened. They started as performance reporters and what they did is Most institutions were managed by asset management departments at banks. The consultants basically with their performance reports show that they're not really doing a good job for a lot of money. So they started moving them out. And to do that they, they started offering asset allocation advice and investment manager search advice. But you know, their background was not really in that. And as time went on and on, they kept expanding their businesses by using that as the base of their value proposition. And it's, there's a lot of evidence that it is causing institutions, large institutions, to over diversify their portfolios and expensive asset classes, get into asset classes that they don't belong in and overuse active strategies. And if you look at the massive increase in alternatives since, and this came from David Swenson after David Swensen's book came out in 2000, consultants are encouraging it. And the funny thing is sometimes they just do back of the envelope math. And it's like the largest 10 consulting firms have literally tens of trillions under advisement. Like how it's not even mathematically possible for them to add value in aggregate if they have tens of trillion dollars. I mean, it's just basic back of the envelope math, you know, so the, the question is whether you're going to get lucky and, and they're going to, you know, you're going to outperform. But on average, I don't see how it's mathematically possible for them to add value by doing anything but index.

[A]

And just to pile on a little bit of the skepticism about consultants here, we're not saying that the asset managers feel like they're just not smart enough and the consultants are, it's a way to divert blame if something goes wrong because you can say, well, the consultant said it was fine.

[B]

Yeah, right.

[A]

So that kind of, that does give.

[B]

You know, I don't know the extent. That's probably unspoken stuff in the back of a trustee's mind. But yeah, there is an element of that. If they are doing what supposedly a professional organization recommended, that probably gives them some legal cover. I mean, I'm not a lawyer, but my guess is that does go into a lot of thinking.

[A]

I've certainly seen in the asset management world where a consultant steps in, often their analysis is based on what's your performance the last three years. And if you don't fail, if you fail that test, then you're out.

[B]

And, and by the way, three years is not, not only is it not a long time, it exposes you to the problem of it may very well have just been A blip? It probably was. Well I shouldn't say probably. You have to look at the situation. But there's a good chance it was a blip and by the time they hire that manager they're going to go the other way. And there's actually studies done on this where that does happen. They look at higher fire decisions of institutional investors and the performance. I forget the exact time period maybe five or 10 years before is much higher than after on average because they're, they're buying at the top and selling at the bottom.

[A]

Right now private credit USUFIC is called private placement. Right. Like lending to non public companies has been around for ages.

[B]

That's what J. PIERPONT Morgan did 100 years ago.

[A]

And it's also origin of finance generally in terms of just yeah, credit provision. Now what. Obviously we're living in a different world now but how is it different now? Now that we call it private credit, we have this label on it that are funds there more funds out there.

[B]

I think the main difference is everyone's allocating to it. I mean it's, it's, it's caught on as a trend. I think that's the main difference. And you know I talked about this in the presentation. It, it is the typical alternative asset class cycle where you have a void that opens up, a legitimate void that opens up in the market. So venture capital became a need because the banks were skittish after the great. They're still skittish after the Great Depression because I don't know, 30% of them failed. And there were a lot of post World War II technologies that could be commercialized. So that gave birth to the venture capital industry. But over time it gets overallocated and only the very, very strong and top funds add value. And that's where we are today. And I see private credit following that same cycle there was a legitimate void that opened after the global financial crisis because all the banks, it's actually kind of similar to what happened with venture capital because the bank banks, just like they did after the Great Depression, they, they were forced to pull back and, and rebuild their reserves and become more conservative. And this opened up now and this, this question came up in the, from the audience that I, I mean I strongly suspect based on just, you know, the signs around that supply of capital far exceeds the demand for attractive enough opportunities. But that's what happens in the late phase. Like you get, everyone follows the, the early adopters and you just get too much capital chasing too little supply. And I think that's where we are right now.

[A]

Right. And for people reading your book, how much private credit is there in there? Do you put that, how do you, how would you describe that?

[B]

I actually don't remember, to be honest with you. But I probably mentioned it when I talked about alternative asset classes. I have written a paper for the enterprising investor on private credit. I mentioned it in a paper that I wrote for the, for Financial History magazine on the alternative. What we're talking about the alternative asset class cycle. It's called. You can, you can Google it, it's free. It's called the a 45 year flood and it describes the cycle we're talking about. But yeah, so I mentioned it, but it's, it's becoming, it's really the last couple years that it's. I published the, I finished the book two years ago, so it's really accelerated.

[A]

But it certainly has its place right in financial history as like these cycles and all that.

[B]

You can start in there again like that. That's usually how these cycles start, is there's a void that appears in the market that's legitimate. It's just that human instinct is to. Everyone starts, you know, it's like the last watering hole and pretty soon it goes dry or it's not dry. Like if you're three rows back, you're not going to be able to take advantage of the watering hole.

[A]

So I'm interested in how you think about the professionalization, I'd say, of finance generally. I do know that you mentioned an article of yours about how modern portfolio theory, I would say it's a contribution but also can be overused or misused. Maybe you can give a little more.

[B]

Flavor on the, the problem with the, I mean this is a little generalization, but the problem with modern portfolio theory is a lot of institutions. I'm a little less familiar with how this plays out with individual investors, but with large institutions, what consultants and, or mainly consultants, some staff to some degree will create assumptions for like, you know, 20, 30 asset classes, some of which don't have nearly enough history to create a reliable assumption. And they, they create these models where it just takes the expected return, the expected risk and the inner asset correlation and shows what is a supposedly optimal portfolio. But the underlying assumptions on those asset classes are very unreliable. And number two, a lot of these asset classes require skill. Like it's like we were talking about with private credit. If you're not skilled, I don't care what the optimizer says, it doesn't matter. And there's so Much overreliance on that, an MPT in areas that are just well beyond the margin of error. And it, it causes people to neglect. At the end of the presentation, I emphasize to everybody like demand track records and you know, do your due diligence. If you're going to, you're going to enter the space because if someone just tells you to allocate to it based on an assumption, that is not enough. And that's really the problem I see with mean variance optimization and modern portfolio theory.

[A]

And it's certainly also the issue of converting what you're seeing, the historical data too. That's forward looking assumptions because assumption is a forward looking statement.

[B]

I mean we looked at private credit. So there's a, there's a, I won't name the consulting firm, but there was a consulting firm that was assuming over 20 years real like net of inflation, like a six and a half. I think it's slightly below a six and a half percent real return for 20 years compounded for private credit. That's really aggressive. It just, it seems pretty, pretty out there. And if people are allocating on that, based on that without any evidence of skill, good luck.

[A]

What do you think the audience here, hearing you talk, hearing some other views, is there a general, a little bit of more caution now skepticism among the more like professionals that we have here at the conference or.

[B]

I hope so. I mean I, and you know, I think that I'm actually very complimentary of the cfa. There are places that, you know, I'm not welcome because, you know what I'm saying is not in the interest of a lot of people. But the CFA has been very balanced and I think that everybody benefited from that session from hearing from an asset manager who is more bullish on this sector and somebody who's skeptical. And they're going to make a better. Regardless of which way they go, I hope they make a better decision because they heard both sides.

[A]

Yeah, absolutely. So thank you so much for tuning in. This has been an episode of the Enterprise Investor. You usually find me at the Financial Thought Exchange podcast that is of the Research Foundation. This is broadcasting from the CFA Institute annual conference. Thank you for tuning in. Thank you, Mark.

[B]

Thank you so much. Lara.