What is Private Credit and why it is the Future of Alternative Investments

What if we told you there was an alternative investment asset class that grew from approximately $1 trillion in 2020 to $1.5 trillion at the start of this year? Even more impressively, this opportunity to diversify your investment portfolio is expected to grow to $2.8 trillion by 2028! (reference: Private Credit Market: 2024 Outlook & Opportunities | Morgan Stanley) Not only that, some even feel this is a conservative estimate! (reference: The future of finance | BlackRock Investment Institute) You would think we were describing some unattainable source of income accessible only to the ultra-wealthy. The truth is, this alternative investment is not only within your reach, but it will also generate a stable income for you. The alternative investment we are talking about is private credit.

Before you get started in this fast-growing asset class, let us help you to understand private credit, learn the benefits and risks of this alternative investment, and explain why we know private credit will dominate the future of alternative investing.

What is private credit?

Private credit is a loan from a non-bank lender to private companies. These are typically to privately held, unrated companies that cannot access the traditional loan market. Private credit loans are privately negotiated and are more flexible in providing needed funds to small- and medium-sized enterprises, but also include more protections and command higher interest given the critical role these private lenders are playing. With banks and financial institutions becoming more limited due to regulatory changes made since the Global Financial Crisis in 2008, private credit is now on the rise.

How does private credit work?

There are many types of private credit, including:

1. Direct loans: Direct lending invests in the most senior aspect of the capital structure, and therefore provides steady income with lower risk.

2. Junior debt: An umbrella term for any debt that is subordinate to senior debt. This includes mezzanine financing, a combination of debt and equity, which may result in higher returns.

3. Distressed debt: This involves lending to borrowers who are financially insolvent, or close to it. The risks are naturally higher, but prices are often lower.

4. Special situations: An umbrella term for any number of non-corporate lending that is often not covered by traditional lenders, including merger and acquisition transactions or asset-based financing.

Why is there a rise in private credit investments?

In the aftermath of the global financial crisis in 2008, banks faced regulatory pressure to limit their corporate lending ability. They began to focus on lower capital charge activities, and streamlined lending by halting the practice of smaller, specialised corporate loans. This created a void, leading to companies turning to non-traditional lenders to obtain the funds they needed. Despite charging a higher interest rate, private credit offers flexibility and ready financing, in sharp contrast to banks.

Simply put, private credit has become a necessary means for companies to grow.

How does private credit compare to traditional fixed-income?

Why invest in private credit?

If you are looking for an investment opportunity that offers higher yield with lower volatility, private credit offers a compelling alternative to traditional investing.

Private credit funds often seek a relationship driven approach with borrowers, creating opportunities for the borrower that they otherwise would not have.

Such arrangements often result in protective covenants that are mutually beneficial, avoiding defaults as much as possible while mitigating losses.

What’s more, as the private credit market grow and evolve, it has become more sophisticated and developed more robust and impressive risk management standards. The range of exposures now includes high quality growth companies. It is up to private credit fund managers to be proactive and ensure a healthy risk/return profile for their investors.

Choosing the right private credit fund manager is crucial as they screen borrowers based on their investment objectives and strategies. It is important to do due diligence and consider the creditworthiness of a borrower, to ensure that their current financial health sets them up for regular repayment in the future.

How can you start to invest in private credit?

In the past, only high net worth persons and institutional investors would have the opportunity to invest through a private credit fund. This is because interest in a private credit fund are not listed on an exchange or otherwise transferable.

With Arta Finance suite of alternative investments, you can sign up and invest in minutes. For example, if you wish to get exposure to a private credit fund, Arta allows you to initiate your commitment to one run by Carlyle Group, a global private credit leader. Simply sign the subscription documents and fund your investment, and Arta ensures the fund manager puts your money to work.

Take your first step to invest in private credit today!