As the alternative investment landscape continues its rapid expansion, private credit is emerging as a significant growth story, often overshadowed by the attention given to private equity. This burgeoning asset class offers compelling opportunities for both individual high-net-worth (HNW) investors and registered investment advisors (RIAs) seeking to diversify portfolios and enhance returns. Nelson Chu, founder and CEO of Percent, recently shared his insights on this dynamic sector and how his platform is democratizing access to private credit.
The Rise of Private Credit
Private credit, broadly defined as debt financing provided by non-bank lenders, has experienced a remarkable ascent, particularly in the aftermath of the 2008 Global Financial Crisis. Banks, facing increased regulatory scrutiny and capital constraints, scaled back their lending activities, creating a void that non-bank lenders have adeptly filled. This shift has fueled the growth of private credit funds and platforms, which now play a crucial role in financing businesses of all sizes and consumers.
Nelson Chu, an entrepreneur with a unique journey into the fintech and finance space, founded Percent with the explicit goal of making private credit and alternative investments more accessible. His entrepreneurial spirit, evident from a young age, led him away from traditional career paths and towards building companies. After successfully launching a consulting firm that advised startups on company building, Chu found himself repeatedly drawn back to the finance sector, particularly fintech. This led to the inception of Percent, a platform designed to address the market gap for more approachable alternative investments.
"We really saw a gap in the market where we thought there was a tremendous opportunity to make private credit and alternative investments more approachable for the average investor," Chu explained. "This was through shorter durations, lower minimums, and good yields. All that worked out really well for us."
Navigating the Current Economic Climate
The current economic environment, characterized by elevated inflation and interest rates, presents a unique backdrop for investors. While traditional safe havens like Certificates of Deposit (CDs) and Treasury bonds are offering more attractive yields than in recent years, often in the 4-6% range, they may not be sufficient to outpace inflation, especially when considering the impact of taxes on such income. This reality underscores the importance of seeking investments that can offer superior risk-adjusted returns.
"When inflation is 6%, 7%, 8%, 9%, arguably, it may be higher depending on where you live," Chu noted. "Having a lot of dry powder, having a lot of cash, when inflation is 2%, you can kind of squint and round that down to zero. But when it’s that high, you gotta find something else at that point to be able to offset all of that."
This pursuit of higher, inflation-beating returns is driving increased interest in alternative assets, with private credit emerging as a particularly attractive option. The traditional 60/40 portfolio, long a staple of investment strategies, is increasingly being re-evaluated as market dynamics shift.
The Asset Class: Private Credit Explained
Private credit encompasses a broad spectrum of lending activities, generally 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 assets that produce interest income. A prime example is the securitization of loan portfolios, such as those originated by non-bank lenders in the consumer or small business sectors. By pooling numerous loans, investors can gain exposure to a diversified stream of interest payments, with structures often designed to protect principal through mechanisms like advance rates (e.g., advancing 60% of the total loan value) and other risk mitigation strategies. This segment has seen significant growth, driven by the expansion of non-bank lenders like SoFi, Affirm, and newer players such as Capchase and Wayflyer.
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Corporate Debt: This involves lending directly to a single company, introducing single counterparty risk. Investments here can range from venture debt, financing early-stage companies with high growth potential (often accompanied by equity warrants), to middle-market lending for established businesses generating substantial free cash flow. The risk and return profile of corporate debt can vary significantly based on the company’s stage of development, financial health, and growth prospects.
The spectrum of risk and return within private credit is vast. At one end, investors might find highly secured, investment-grade-like opportunities, while at the other, they might encounter riskier, high-yield propositions akin to distressed debt or early-stage venture debt.
"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," Chu elaborated. "But then, if you’re doing, like, middle market lending or bank commercial lending, these are loans that are upwards of $7500 million to companies that are generating $300 million in free cash flow every year. Like, that’s fine, right? That’s generally probably gonna be fine. And so, it really just runs a spectrum of high yield all the way to investment grade on both sides of the asset class spectrum of private credit."
The Illiquidity Premium
A key consideration for investors in private credit is the illiquidity inherent in these investments compared to publicly traded bonds. This lack of immediate liquidity typically commands an "illiquidity premium," where investors expect higher yields to compensate for the longer lock-up periods.
"You can still expect definitely an illiquidity premium that comes from being in the private credit side versus the public credit side," Chu stated. While precise figures can vary, a typical premium might range from 50 to 150 basis points for investment-grade-like private credit, widening considerably for higher-yield or riskier segments.
The Percent Platform: Democratizing Access
Percent aims to bridge the gap between sophisticated private credit opportunities and a broader investor base. The platform emphasizes transparency, choice, and accessibility.
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Investor Onboarding: The process begins with a straightforward sign-up, followed by identity verification and accreditation verification, typically completed within a day. Investors then link their bank accounts to facilitate transactions.
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Investment Options: Percent offers investors significant optionality:
- Individual Deals: Investors can select specific deals that align with their risk tolerance and investment theses.
- Blended Notes: For a more hands-off approach, Percent offers "blended notes," which are diversified baskets of investments curated around specific themes (e.g., total market, U.S. only, short duration, high yield). These function akin to index funds, algorithmically allocating capital across various opportunities.
"We have investors who oftentimes go through the try-before-you-buy model, right?" Chu explained. "So we always try and keep a couple deals out there that have $500 minimums, which is very, very low and also short-duration investments. So sub-nine months with the ability to refinance them in, like, two to three months’ time. So really it’s a lockup of about two to three months just for the investors to get a sense for how it works."
This approach allows investors to experience the platform with minimal commitment before scaling their allocations.
Transparency and Due Diligence
A cornerstone of Percent’s offering is its commitment to transparency. The platform provides investors with extensive data and analysis, a rarity in the historically opaque private credit market.
"Private credit, historically, has been a very opaque asset class," Chu noted. "When you invest in a private credit fund, you kind of sort of know what they’re investing into. You get a statement at the end of every month. You have like a mark to market NAV at some point over the course of the year. And that’s all well and good. But what actually happens underneath the covers is very opaque and really unknown to the average investor who is investing in these funds."
Percent aims to demystify this by offering detailed deal structuring information, portfolio expected default rates, advance rates, currency hedging details, and underlying asset performance data. This level of granular information empowers investors to make informed decisions.
The platform also employs a public market-style execution process for its deals, allowing investors several weeks to conduct due diligence and place orders with specific minimums, maximums, and desired APY thresholds. This transparency in pricing and demand is invaluable for both investors and the borrowers seeking capital.
The Outlook for Private Credit
The consensus among industry experts and prognosticators is that private credit is poised for continued strong performance in the coming year. As inflation potentially moderates and interest rates remain elevated, the demand for credit across various sectors is expected to persist.
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Venture Debt: With venture capital funding becoming more challenging to secure, venture debt is seeing increased demand as companies seek bridge financing to reach their next equity rounds. This segment offers opportunities for investors willing to take on higher risk for potentially higher returns, often with equity upside.
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Asset-Backed Lending (Consumer & Small Business): While consumer credit may face headwinds due to rising credit card debt and loan delinquencies, particularly in developed economies, emerging markets continue to present significant opportunities. In these regions, private credit fills a fundamental financing gap for entrepreneurs and the underbanked, offering both impact and financial returns. Small business lending, historically resilient, is also expected to perform well, especially when structured with appropriate risk mitigation.
"I think between consumer and small credit…small business, I would say small business probably performs better this year than consumer," Chu predicted. "But consumer is going to be priced, realistically, probably higher at that point. And so, what is that risk worth to you? That’s totally up to you to decide."
Impact Investing and Global Reach
Beyond yield generation, private credit platforms like Percent are increasingly facilitating impact investing. Investors can tailor their portfolios to support specific sectors or geographies, such as financing small businesses in emerging markets or providing capital to underserved populations.
"We have seen groups and individuals who basically say, ‘I only do international deals,’ right, especially in emerging markets. And that’s very important for them," Chu noted. "They focus almost exclusively on consumer and the under-banked population and how they can actually support the lenders for providing capital and access for this population that desperately needs some sort of banking capabilities."
This blend of financial returns and positive societal impact is a growing trend, demonstrating the evolving role of alternative investments in a diversified portfolio.
Conclusion
The private credit market has matured significantly, offering a diverse range of opportunities for investors seeking income, diversification, and risk-adjusted returns. Platforms like Percent are instrumental in democratizing access to this complex asset class, providing transparency, choice, and innovative solutions. As the economic landscape continues to evolve, private credit is well-positioned to remain a critical component of sophisticated investment strategies, enabling investors to achieve their financial goals while potentially contributing to economic growth and development globally.
For those interested in learning more, Percent can be found at Percent.com.
