The alternative investment landscape, long dominated by the visibility of private equity, is witnessing a significant and independent growth trajectory in private credit. As asset managers increasingly allocate capital to this burgeoning sector, high-net-worth (HNW) individuals and registered investment advisors (RIAs) are finding new avenues for diversified income and risk-adjusted returns. This trend was a central theme in a recent discussion featuring Nelson Chu, founder and CEO of Percent, a prominent private credit platform, and Andy Hagans, host of the Alternative Investment Podcast.
The Growing Appeal of Private Credit
Private credit, broadly defined as debt financing provided by non-bank lenders, has emerged as a critical component of modern investment portfolios. Its ascent gained momentum in the wake of the 2008 global financial crisis, which led to stricter regulations on traditional banks, prompting them to scale back lending activities. This created a void that non-bank lenders, often backed by venture capital, stepped in to fill, providing crucial capital for businesses and consumers.
"The reality is they’ve probably interacted with it in some way, shape, or form," Chu noted during the podcast, emphasizing that while the asset class is relatively young, its impact is widespread. He highlighted that the traditional 60/40 portfolio model is increasingly being viewed as outdated, necessitating diversification into alternatives like private credit.
Data from PitchBook underscored this burgeoning interest, indicating that private credit ranked third in asset class demand in the latter half of 2022. This surge is attributed to the asset class’s ability to offer consistent, asset-backed returns, a particularly attractive proposition in an environment characterized by elevated inflation and volatile equity markets.
Understanding the Spectrum of Private Credit
Private credit encompasses a diverse range of investment strategies, often categorized into two primary arms: asset-backed lending and corporate debt.
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Asset-Backed Lending: This involves securitizing cash flows generated from various sources, most notably loans. Non-bank lenders, in both consumer and small business segments, package portfolios of loans and offer them to investors. This structure often includes mechanisms to protect investor principal, such as advancing a percentage of the total loan value and incorporating risk mitigants for potential defaults. Examples of entities involved in this space include prominent buy-now-pay-later providers and innovative fintech lenders like Capchase and Wayflyer.
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Corporate Debt: This segment involves direct lending to individual companies. Investments can range from venture debt, supporting early-stage companies with high growth potential but uncertain profitability, to middle-market lending for established businesses. The risk-return profile here is highly dependent on the financial health and growth prospects of the specific corporate borrower, often including equity-like upside through warrants or other profit-sharing arrangements.
Chu clarified that the risk and return spectrum within private credit is wide. "There’s always the, call it the triple C’s of the world in the lower middle market range that is in ABS and corporate debt," he explained. Conversely, highly-rated securitizations for companies nearing public offerings can command lower costs of capital. This nuanced structure allows investors to select opportunities aligned with their specific risk appetites, from high-yield to investment-grade equivalents.
The Role of Inflation and Interest Rates
The current macroeconomic environment, marked by persistent inflation and elevated interest rates, has further amplified the appeal of private credit. While traditional safe havens like Certificates of Deposit (CDs) and Treasuries offer higher yields than in recent years, they often fail to outpace inflation, leading to a decline in real returns.
"When inflation is basically eating up all of your gross return and then some, then that’s where I feel like paying taxes, it’s like salt in the wound," Hagans commented, highlighting the importance of considering both gross returns and inflation when evaluating investment performance.
In this context, private credit offers the potential for attractive yields that can more effectively combat inflation. Chu noted that while CDs and Treasuries might yield 4-6%, investors need to seek additional avenues to preserve and grow their capital. The illiquidity premium associated with private credit, typically ranging from 50 to 150 basis points compared to public credit instruments of similar risk, further enhances its attractiveness.
Percent: Democratizing Access to Private Credit
Nelson Chu’s entrepreneurial journey led him to identify a significant market gap: the inaccessibility of private credit opportunities for individual HNW investors and RIAs. This realization fueled the creation of Percent, a platform designed to bridge this divide.
"We thought there was a tremendous opportunity to make private credit and alternative investments more approachable for the average investor, whether it’s through shorter durations, lower minimums, good yields," Chu explained.
The Percent platform distinguishes itself through several key features:
- Accessibility: Percent offers significantly lower minimum investment requirements compared to traditional private credit funds, making it accessible to a broader range of accredited investors.
- Transparency: The platform emphasizes unprecedented transparency in the private credit market. Investors can access detailed information on deal structures, underlying asset performance, and pricing dynamics, mirroring the transparency found in public markets. This allows for more informed decision-making.
- Optionality and Diversification: Percent provides investors with a wide array of choices, including individual deals across various sectors and geographies, as well as thematic "blended notes." These blended notes function like diversified baskets of investments, allowing for a "set-it-and-forget-it" approach for investors seeking broader exposure without the need to manage individual allocations.
- Efficient Execution: The platform employs a public market-style execution process, allowing investors several weeks to conduct due diligence and place orders, rather than a first-come, first-served model. This enables real-time market feedback on deal pricing and structure.
The Evolution of Investor Behavior and Market Standards
Chu observed a notable evolution in investor behavior, particularly in the wake of recent market volatility. While accredited investors historically gravitated towards higher-yielding opportunities, a "flight to quality" has emerged, with increased demand for deals offering lower yields but robust risk management and asset backing.
"Credit investors, over the course of the last call at nine to 12 months, have gotten wiser from terms of a risk management standpoint and what they’re looking for," he stated. This shift indicates a growing sophistication among individual investors in evaluating risk-adjusted returns.
Percent’s commitment to establishing new market standards in private credit is evident in its rigorous underwriting process and the detailed reporting it provides. By dissecting deal structures and asset performance in granular detail, the platform empowers investors to compare opportunities effectively and make decisions based on comprehensive information.
Impact Investing and Global Reach
Beyond traditional yield generation, Percent also facilitates impact investing. The platform’s diverse offerings allow investors to target specific sectors or regions that align with their values. Chu highlighted instances where investors specifically sought out emerging market deals, focusing on providing credit to underserved populations and supporting entrepreneurs in regions with significant financing gaps.
"We have seen groups and individuals who basically say, ‘I only do international deals,’ right, especially in emerging markets," Chu remarked. This demonstrates the platform’s capacity to cater to a spectrum of investor motivations, from purely financial returns to a desire to effect positive social change.
The platform’s global reach extends to countries like Colombia, Mexico, and various parts of Asia and Africa, providing a conduit for capital to flow into economies where access to traditional banking services may be limited. This aspect of Percent’s offering underscores the structural need for private credit in developing economies, positioning it as more than just an alternative investment but a vital financial infrastructure component.
Outlook for Private Credit
Looking ahead, the outlook for private credit remains robust. Projections indicate another strong year for the asset class, driven by continued demand and the evolving macroeconomic landscape.
"They’re all expecting private credit to have a very good year," Chu asserted. He anticipates sustained demand for venture debt as companies navigate a more challenging equity financing environment. On the asset-backed side, both consumer and small business lending are expected to perform well, though consumer credit may command higher yields due to increased debt levels and potential economic headwinds.
Chu emphasized that while risks exist, the credit markets, both public and private, tend to remain liquid as long as pricing is attractive. The inherent liquidity provided by Percent’s shorter refinancing cycles further mitigates concerns about illiquidity, allowing investors to enter and exit positions with relative ease.
Conclusion
The growth of private credit represents a significant shift in the alternative investment universe. Platforms like Percent are playing a crucial role in democratizing access to this asset class, offering transparency, choice, and the potential for attractive risk-adjusted returns. As inflation and interest rate dynamics continue to shape the investment landscape, private credit is solidifying its position not merely as an alternative but as an essential pillar for building resilient and diversified portfolios.
For those seeking to learn more about the Percent platform and its offerings, the company website, Percent.com, serves as the primary resource. Investors can also reach out to their investor relations team directly via email at [email protected] for further inquiries.
