Advance Technology

Can Private Credit Be the Right Strategy for These Uncertain Times

Private credit isany privately negotiated loan and debt financing disbursed outside of public debt markets. Private debt includes venture debt, business and consumer loans, real estate loans and various other forms of private debt. An inability to access public credit makes individuals seeking small consumer loans, small businesses and startupsturn to private credit.

Private credit includes a range of fixed income instruments that provide differing returns. While some of these are more “equity-like” strategies providing higher returns, others are more “bond-like” and designed to generate stable income. Private credit can be an attractive alternative or an addition to a range of traditional investments like stocks and bonds. Speak to a Wealth Manager to understand how private credit investments suit your portfolio objectives and risk appetite.

Let’s look at some reasons to consider private credit in today’s market conditions.

Outstanding growth:private credit has traditionally not been a well-known asset class; it has however grown enormously in the last decade and is set to expand further due to demand by both investors and borrowers. Private credit often delivers higher yields because borrowers are willing to pay higher interest rates to secure the financing they want, which they are unable to get through a bank loan for any number of reasons. In the early days, it was the large institutions that accessed the private credit market, however, with the expansion of the market, demand from private borrowers is on the rise due to greater accessibility.

Higher-income and yield: because of the higher risks attributed to non-bank lending, investors can reap higher interest rates compared to traditional instruments like bonds and loans. Direct lending is typically lower in risk and stable in returns compared to some other types of private credit.Because direct lending is a senior secured loan, the lender has priority for repayment over other unsecured debt. Direct loans also have 5-7-year maturities and floating coupon rates. These features have enabled direct lending to produce more satisfactory returns with greater consistency compared to other types of debt. There is less transparency in the private debt market compared to public bond markets. It is therefore important that you choose anexperienced wealth manager who has access to good credit research and underwriting capabilities to help them select companies that perform well.

Floating rates:we are now experiencing a new interest rate cycle with higher inflation. In such a scenario fixed income investors will find it difficult to earn a good enough yield on their long-duration investments.Floating rate loans become attractive to investors in a market with rising rates because income will rise along with increasing interest rates. Because private credit is on a floating rate it can successfully circumvent both the rate risk and duration risk that is intrinsic to traditional fixed income instruments.

Less volatility:because private assets are not traded in public markets,they tend to attract less volatility. When compared with public markets, private loans traditionally offer relatively low volatility and attractive returns. Another reason to consider private credit.

Emerson Burton
the authorEmerson Burton

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