Why Invest in Private Credit?
Private credit, which can also be known as private lending, is generally defined as lending by non-bank financial institutions. These are often to small and mid-sized businesses who are often highly leveraged and generally are unable to borrow money from other sources.
So why invest?
Potential for higher returns that on the open market (often these are double digit)
Good diversification away from standard investments
Income on a regular basis (this can be paid quarterly or bi-annually)
Another passive income stream
One of the main things with private credit, is people like the fact you have a fixed return no matter what the market conditions are. Private credit plays an important role in the financial system by making loans available to businesses that may not be able to secure them through other sources
As investors in private credit are making loans, rather than having shares within the company, they are more likely to be repaid if the borrower/company faces financial difficulty on bankcruptcy.
Pros and Cons of Private Credit Investing
Pros
Huge growth within the industry
Fixed returns typically a lot higher than other fixed income opportunities
Diversification away from more common asset classes
Priority for repayment if a company were to face financial difficulty or bankruptcy
Cons
High minimum investments - often in the region of $25-50k
Typically locked in for 1,2 and 3 year fixed periods
Mid size businesses so there is arguably a chance of defaulting
Lack of transparency on charges and business/ lack of regulatory protections
With this being said, private credit can be a great investment opportunity for the right client. It can provide fixed double digit returns giving good levels of diversification away from your standard equity portfolios.
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Disclaimer: This blog post is for informational purposes and should not be considered financial advice. Always consult a financial adviser for personalised guidance.
