The alternative investment landscape, particularly private equity, often commands significant attention for its rapid asset accumulation. However, private credit is carving out its own substantial growth trajectory, offering a compelling avenue for both high-net-worth (HNW) individuals and registered investment advisors (RIAs) seeking robust returns. This dynamic sector was the focus of a recent discussion on The Alternative Investment Podcast, where host Andy Hagans welcomed Nelson Chu, founder and CEO of Percent, a leading private credit platform. Their conversation shed light on the evolving role of private credit, its accessibility to a broader investor base, and its strategic importance in today’s economic climate.
The Rise of Private Credit: A Post-GFC Phenomenon
Chu explained that private credit as a widely understood asset class is a relatively recent development, gaining significant traction in the wake of the 2008 Global Financial Crisis. "After ’08, when the banks really stopped lending to consumers, to small businesses, you had this rise of nonbank lending that emerged," Chu stated. These nonbank lenders, often financed by venture capital, stepped in to fill the void left by traditional financial institutions, becoming crucial engines for economic growth. Consequently, credit funds and asset managers emerged to provide the necessary capital for these burgeoning lenders, solidifying private credit’s place in the financial ecosystem.
This relatively short history means that many investors, even those well-versed in alternatives, may not have direct exposure to private credit, despite likely interacting with it indirectly. "The reality is they’ve probably interacted with it in some way, shape, or form," Chu noted, highlighting its pervasive influence. He further emphasized the obsolescence of the traditional 60/40 portfolio in the current market, suggesting that private credit is becoming an essential component for diversification and income generation.
Navigating a High-Inflation Environment
The current economic environment, characterized by persistent inflation, has amplified the importance of income-generating assets. Hagans pointed out the erosive effect of inflation on capital, particularly when yields on traditional safe havens like CDs and Treasuries barely keep pace. "When inflation is 2%, you can kind of squint and round that down to zero, right? But when it’s 6%, 7%, 8%, 9%… you’re not beating inflation," Hagans observed. This scenario underscores the need for investors to seek investments that can outpace rising prices and preserve purchasing power.
Chu echoed this sentiment, noting that while current Treasury yields are more attractive than in recent years, they fall short of combating significant inflation. This necessitates exploring alternative avenues like private credit, which can offer attractive risk-adjusted returns. The conversation also touched upon the tax implications of income, particularly for HNW individuals and family offices, where the "triple net" aspect of returns—gross return, after inflation, and after taxes—becomes paramount.
The Spectrum of Private Credit: From Asset-Backed to Corporate Debt
Private credit encompasses a broad range of strategies, broadly categorized into two main arms: asset-backed and corporate debt.
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Asset-Backed Private Credit: This segment involves securitizing cash flows generated from interest-bearing assets, most commonly loans. Nonbank lenders in consumer or small business financing often package pools of loans, creating structures that protect investor principal. These structures can advance a significant percentage of the total loan value, with additional risk mitigation measures in place to address defaults. Examples include securitizations of loans made by fintech companies like SoFi, Affirm, Capchase, and Wayflyer.
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Corporate Debt Private Credit: This side of the market involves lending directly to individual companies. The risk profile here is tied to the specific company’s financial health and growth prospects. This can range from venture debt, financing early-stage, often unprofitable companies, to middle-market lending to established businesses with substantial free cash flow. In venture debt, investors may also receive warrants, offering potential equity upside.
Chu clarified that within these two broad categories, there exists a wide spectrum of risk and return. From triple-C rated companies in the lower middle market to highly rated securitizations of multi-billion-dollar loan portfolios, private credit can cater to diverse risk appetites. Similarly, venture debt can carry significant risk but also offer high risk-adjusted upside, while traditional middle-market lending to stable companies may offer more predictable, albeit potentially lower, returns.
The Illiquidity Premium and Investor Profiles
A key characteristic differentiating private credit from public markets is its illiquidity. Hagans inquired about the typical yield premium investors expect for this lack of liquidity. Chu suggested that while broad, the premium generally tightens as one moves closer to investment-grade ratings, typically ranging from 50 to 150 basis points for investment-grade equivalents. For higher-yield segments, this premium can widen considerably, reflecting the increased risk and reduced liquidity.
The platform’s structure at Percent allows for engagement from a wide range of investors, from accredited individuals with smaller allocations to institutional investors seeking larger positions. Chu noted that accredited investors often seek higher yields, frequently targeting investments in the mid-teens or higher, reflecting their need for income to supplement other portfolio returns. Conversely, institutional investors, bound by mandates, tend to have more defined allocation buckets and often accept lower yields on investment-grade opportunities, provided they meet their overall portfolio objectives.
An interesting observation from Chu was the recent "flight to quality" within private credit, even amidst higher rates. Investors demonstrated a greater willingness to accept lower yields (sub-10%) on deals perceived as high quality with low default rates, indicating a maturing risk management approach. This trend contrasts with the traditional expectation of higher yields for accredited investors, suggesting a growing sophistication in how they evaluate risk.
Percent: Revolutionizing Access to Private Credit
Nelson Chu founded Percent with a clear mission: to make private credit and alternative investments more accessible. The platform distinguishes itself through its commitment to transparency, choice, and a user-friendly experience.
"Our platform… is designed to give optionality," Chu explained. Investors can choose to invest in individual deals, allowing them to meticulously select specific opportunities based on their thesis. For those preferring a more hands-off approach, Percent offers "blended notes." These are diversified baskets of investments, structured around specific themes such as a "total market" approach (investing in every deal on the platform), "U.S. only," "short duration only," or "high yield only." This "set-it-and-forget-it" option allows for algorithmic allocation across numerous opportunities, simplifying portfolio management.
A cornerstone of Percent’s offering is its rigorous underwriting process and commitment to transparency. Chu emphasized that private credit has historically been an opaque asset class. Percent aims to replicate the transparency found in public markets, providing investors with detailed information on deal structures, underlying asset performance, and pricing dynamics. "Our job is just to disclose as much information as humanly possible so they can make the most educated decisions," Chu stated.
The platform also employs a public market-style execution process, allowing investors several weeks to conduct due diligence and place orders. This contrasts with the typical first-come, first-served model, enabling investors to set minimum and maximum yield expectations, which inform the pricing of deals in real-time. This transparency provides valuable feedback to underwriters and borrowers, ensuring that deals are priced appropriately and structured to meet market demand.
Impact Investing and Emerging Markets
Beyond traditional yield-seeking, the Percent platform facilitates impact investing. Chu highlighted instances where investors specifically choose to focus on international deals, particularly in emerging markets, to support underserved populations. These investors often prioritize lending to the underbanked and those lacking access to traditional banking services, demonstrating a desire to "do well by doing good."
The platform’s global reach allows investors to participate in financing businesses in regions where private credit is not merely a desirable income supplement but a structural necessity for economic development. Chu noted that many entrepreneurs in emerging markets, often educated in the U.S., are bringing innovative, mobile-first financial solutions to their home countries, addressing gaps left by nascent banking sectors. This not only provides crucial financing but also fosters financial inclusion.
Outlook for Private Credit
Looking ahead, the consensus among prognosticators, including those at Percent, is for a strong year for private credit. Chu anticipates that as inflation potentially moderates, the demand for yield will remain robust. The venture debt sector, in particular, is expected to see continued activity as companies seek financing to bridge to the next equity round in a more challenging venture capital environment.
On the asset-backed side, both small business and consumer lending are expected to perform, albeit with different risk-return profiles. Chu suggested that while consumer credit might offer higher potential yields due to increased credit card debt and potential challenges in developed economies, small business lending is likely to demonstrate more stable performance, particularly in emerging markets where such financing is critical.
The inherent liquidity of Percent’s offerings, primarily driven by shorter refinancing cycles rather than a traditional secondary market, provides investors with a degree of flexibility. This "intermittent liquidity" allows for regular redeployment of capital, mitigating the traditional illiquidity concerns associated with private credit.
In conclusion, private credit has solidified its position as a vital asset class, offering diversification, attractive income, and opportunities for impact. Platforms like Percent are democratizing access to this complex market, empowering a broader range of investors to navigate the evolving financial landscape and achieve their investment objectives.
