As the alternative investment landscape continues its rapid expansion, private credit has emerged as a significant growth engine, often operating in the shadow of its more prominent counterpart, private equity. This burgeoning asset class presents a compelling opportunity for investors seeking consistent income streams and diversification. To explore this dynamic sector and its accessibility for sophisticated investors, Andy Hagans of AltsDb sat down with Nelson Chu, founder and CEO of Percent, a leading private credit platform. Their discussion, featured on The Alternative Investment Podcast, illuminated the intricacies of private credit, its growing role in diversified portfolios, and how platforms like Percent are bridging the gap for individual high-net-worth (HNW) investors and registered investment advisors (RIAs).
The Enduring Appeal of Income in a Shifting Economic Climate
The conversation opened with a foundational premise: "income never goes out of style." This sentiment, echoed by both Hagans and Chu, underscores a persistent investor demand for predictable returns, a demand that has grown particularly acute in the current macroeconomic environment. With inflation significantly eroding the purchasing power of traditional savings and low yields on conventional fixed-income instruments, investors are increasingly compelled to seek out alternative avenues for income generation.
Chu elaborated on the origins of Percent, tracing his entrepreneurial journey back to a rebellious youth that eschewed traditional paths. Despite initial detours, his career eventually led him back to finance, specifically the burgeoning fintech space. This path, he explained, was driven by a keen observation of market inefficiencies. "It was really seeing 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 stated, highlighting Percent’s mission to provide access through shorter durations and lower minimums, coupled with attractive yields.
The current economic climate, characterized by persistent inflation and higher interest rates, has amplified the relevance of private credit. As Chu noted, even seemingly attractive yields from Certificates of Deposit (CDs) and Treasuries (4-6%) are often insufficient to outpace inflation, especially after accounting for taxes. This reality pushes investors to explore strategies that offer a more robust risk-adjusted return profile.
Understanding the Private Credit Landscape: A Growing Asset Class
Private credit, as an asset class, has seen significant evolution, particularly in the post-2008 financial crisis era. The tightening of lending standards by traditional banks created a vacuum, which nonbank lenders and private credit funds have increasingly filled. These entities now play a crucial role in financing a broad spectrum of economic activity, from small businesses to consumer loans.
Chu detailed the dual nature of private credit, broadly categorizing it into two main arms: asset-backed securitization (ABS) and corporate debt. ABS involves securitizing cash flows generated from pools of loans, such as consumer or small business lending. This structure can offer principal protection by advancing a portion of the total loan value and incorporating risk mitigation strategies. Corporate debt, on the other hand, involves lending to individual companies, carrying a single counterparty risk. This can range from venture debt for early-stage, high-growth companies to middle-market lending for established businesses.
The asset-backed side has witnessed substantial growth, fueled by the proliferation of nonbank lenders like SoFi and Affirm, as well as newer entrants such as Capchase and Wayflyer. These entities are essential for providing capital to businesses and consumers who might not qualify for traditional bank financing.
The Spectrum of Risk and Return in Private Credit
While private credit offers diverse opportunities, the risk-return profiles vary significantly. Chu clarified that the asset class spans a wide spectrum, from high-yield offerings akin to "junk bonds" to more conservative, investment-grade-like opportunities. Early-stage lenders or companies with unproven track records might command higher yields, reflecting increased risk. Conversely, larger, more established entities seeking substantial securitizations might secure lower costs of capital.
Venture debt, for instance, often involves lending to companies without immediate profitability but with significant venture capital backing. This can offer high risk-adjusted upside, potentially including warrants in the company. Middle-market lending to companies with strong free cash flow, however, presents a more stable, albeit potentially lower-yielding, investment.
The illiquidity premium associated with private credit, compared to its public market counterparts, is a key factor influencing yield. Chu estimated this premium to range from 50 to 150 basis points for investment-grade-like private credit, widening considerably for higher-yield opportunities. This premium compensates investors for the inability to easily trade their positions in the open market.
Democratizing Access: The Percent Platform
Percent’s core mission is to make private credit accessible and understandable to a broader investor base. The platform addresses the historical opacity of the asset class by providing a high degree of transparency and a structured investment process.
"We’ve learned how to create almost like the market standard for a private credit," Chu explained, referring to the platform’s rigorous underwriting and due diligence processes. Percent meticulously analyzes deals, offering investors granular data on loan performance, obligor concentration, expected default rates, and currency hedging strategies—elements typically unseen in traditional private credit investments. This transparency empowers investors to make informed decisions by comparing deals based on detailed structural and performance metrics.
The platform offers a "try-before-you-buy" model, featuring low minimums (as low as $500) and short-duration investments (sub-nine months) that allow investors to gain familiarity with the process and the asset class. For those seeking a more passive approach, Percent offers "blended notes"—diversified baskets of investments curated around specific themes such as total market, U.S. only, short duration, or high yield. These notes provide a set-it-and-forget-it solution, algorithmically allocating capital across various opportunities.
Navigating the Market: Investor Behavior and Platform Evolution
The platform’s structure reflects an understanding of investor behavior. Accredited investors, often seeking higher yields to complement their equity and alternative allocations, tend to gravitate towards mid-teen APYs. Conversely, institutional investors, with lower hurdle rates and specific allocation mandates, often focus on higher-quality credit, seeking modest but consistent returns.
Chu noted an interesting shift in investor sentiment, particularly in the past year. Despite higher rates, there has been a "flight to quality," with investors increasingly seeking deals under 10% yields if the underlying structure is sound and the default rate is low. This indicates a growing maturity in risk management among credit investors.
Percent’s innovative market-style execution process, akin to public market bond offerings, allows investors several weeks to conduct due diligence and place orders. This process includes specifying minimum and maximum investment amounts and desired APYs. The platform then provides real-time visibility into the order book, enabling underwriters and borrowers to determine optimal pricing. This transparency not only benefits investors but also provides valuable market feedback to deal originators, helping them price and structure offerings appropriately.
"We track all of that," Chu stated, referring to the data gathered from deal traction. "In the underwriter portal… they actually can see the full market and how it’s pricing." This data-driven approach ensures that offerings are aligned with investor expectations, preventing under-subscription or, conversely, ensuring that deals are priced to attract sufficient capital.
Impact Investing and the Future of Private Credit
Beyond pure financial returns, a growing segment of investors is seeking to align their investments with social and environmental impact. While Chu carefully navigated the often-politicized term "ESG," he acknowledged the increasing demand for investments that contribute positively to the world.
Percent’s platform, with its diverse range of sectors and geographies, naturally facilitates impact-oriented investing. Chu highlighted anecdotes of investors exclusively focusing on international deals, particularly in emerging markets, to support the underbanked population and entrepreneurs. These investors often prioritize lending to financial institutions that provide crucial banking services in regions where traditional banking infrastructure is limited.
This focus on emerging markets is particularly significant. Many entrepreneurs in these regions, educated in Western financial systems, are bringing innovative banking technologies to their home countries, addressing a critical financing gap for small and medium-sized businesses (SMBs) and underserved populations. This "private credit revolution," as Hagans termed it, is not merely about generating income but about fostering economic development and financial inclusion.
Outlook for Private Credit in 2023 and Beyond
Looking ahead, projections indicate a strong year for private credit. As inflation shows signs of disinflation and interest rates remain elevated, the asset class is poised to offer attractive risk-adjusted returns. Chu anticipates continued demand for venture debt, as companies seek to bridge financing gaps amidst a more challenging venture capital environment.
On the asset-backed side, both small business and consumer lending present opportunities, though with differing risk profiles. Small business lending is expected to demonstrate resilient performance, largely insulated from economic downturns unless faced with severe systemic shocks. Consumer credit, while potentially offering higher yields due to increased credit card debt and loan delinquencies, requires careful underwriting and asset performance analysis.
Chu emphasized that in credit markets, unlike equity markets, there is "always a price that someone is willing to take." This inherent liquidity, coupled with Percent’s focus on shorter refinancing cycles and the option of blended notes, provides investors with a degree of flexibility not typically found in traditional private credit.
The platform’s commitment to transparency, choice, and empowering investors with information positions it as a vital resource for navigating the evolving landscape of private credit. As the asset class continues its maturation, platforms like Percent are instrumental in democratizing access, enabling a wider range of investors to participate in its growth and benefit from its compelling income-generating potential.
For those interested in learning more, Percent.com serves as the primary resource, with an investor relations team ready to assist. The platform’s dedication to transparency and investor education underscores its ambition to redefine accessibility within the dynamic world of alternative investments.
