The alternative investment landscape is experiencing a significant evolution, with private credit emerging as a dynamic and increasingly vital asset class, often operating in the shadow of its more widely discussed counterpart, private equity. As the demand for diversified income streams and risk-adjusted returns grows, platforms like Percent are at the forefront of making these opportunities accessible to a broader investor base, including high-net-worth individuals and registered investment advisors (RIAs).
In a recent discussion on The Alternative Investment Podcast, Nelson Chu, founder and CEO of Percent, shared insights into the burgeoning private credit market and the role his platform plays in connecting investors with compelling opportunities. The conversation highlighted the shifting dynamics of portfolio construction, the unique characteristics of private credit, and the innovative approach Percent employs to foster transparency and accessibility.
The Rise of Private Credit: A Post-Financial Crisis Phenomenon
The growth of private credit as a distinct asset class is a relatively recent development, largely spurred by the aftermath of the 2008 global financial crisis. As traditional banks scaled back their lending activities, particularly to consumers and small businesses, a vacuum emerged that nonbank lenders began to fill. These entities, often fueled by venture capital, became crucial conduits for economic growth, providing essential financing without the balance sheet constraints of traditional financial institutions.
"Private credit as a well-understood asset class that’s really kind of hit its stride, didn’t really happen until after the global financial crisis," explained Chu. "So after ’08, when the banks really stopped lending to consumers, to small businesses, you had this rise of nonbank lending that emerged."
This expansion created a demand for capital from asset managers, leading to the development of private credit funds designed to finance these nonbank lenders. The asset class has since matured, offering investors a compelling alternative to traditional fixed income, especially in an environment of fluctuating interest rates and persistent inflation.
Navigating a High-Inflation Environment
The current economic climate, characterized by elevated inflation, has brought renewed attention to the importance of generating income that outpaces the erosion of purchasing power. While traditional safe havens like Certificates of Deposit (CDs) and Treasury bills are offering more attractive yields than in recent years, Chu emphasized that these returns may not be sufficient to combat inflation effectively, particularly after accounting for taxes.
"CDs and Treasuries these days, yielding 4%, 5%, 6% feels good compared to what it used to be, that’s for sure. But you’re not beating inflation," Chu stated. This reality underscores the need for investors to explore asset classes that can deliver higher risk-adjusted returns.
The conversation also touched upon the tax implications of investment income. For high-net-worth individuals and family offices, the "triple net" aspect—considering yield, taxes, and expenses—is paramount. When inflation effectively consumes gross returns, the burden of nominal taxation can exacerbate losses in real terms.
Private Credit: An Asset Class for Every Portfolio?
While private equity and real estate have long been established components of alternative investment portfolios, private credit often remains less understood or integrated. Chu argues that private credit is becoming increasingly essential for a well-rounded investment strategy. The traditional 60/40 stock-bond portfolio has faced challenges, and investors are actively seeking alternatives to enhance diversification and returns.
"The 60/40 model is most definitely dead," Chu asserted. "I think real estate tends to continuously be what’s viewed as the best alternative, per se, to stocks and bonds… But the reality is they’ve probably interacted with it in some way, shape, or form."
Sophisticated managers are increasingly incorporating private credit alongside their equity and real estate strategies, recognizing the flexibility and potential for robust returns across different market cycles. This dual approach allows them to strategically allocate capital to either debt or equity tranches, potentially enhancing control over investment outcomes.
Demystifying the Spectrum of Private Credit
Private credit is not a monolithic asset class; it encompasses a diverse range of strategies and risk profiles. Chu outlined two primary arms:
- Asset-Backed Credit: This involves securitizing cash flows generated from interest-bearing assets, such as loans. Nonbank lenders in consumer or small business financing originate these loans. The structures often involve advancing a percentage of the total loan value, providing a layer of principal protection. Examples include platforms like SoFi, Affirm, and newer entrants like Capchase and Wayflyer, which offer financing solutions to businesses and consumers.
- Corporate Debt: This category involves lending directly to a single company, creating single counterparty risk. Investments can range from venture debt, supporting early-stage companies with high growth potential but uncertain profitability, to middle-market lending for established businesses generating significant free cash flow.
The risk-return spectrum within private credit is broad. Venture debt, for instance, might offer higher yields and potential equity upside through warrants but carries higher risk due to the unproven nature of the underlying companies. Conversely, highly securitized asset-backed deals with strong collateral and established cash flows might offer lower, albeit more predictable, returns.
Chu noted that the illiquidity premium—the additional yield investors expect for tying up their capital—can vary. For investments closer to investment-grade credit, this premium might range from 50 to 150 basis points. For higher-yield or riskier segments, the premium can widen considerably.
Institutional vs. Individual Investors: Divergent Approaches
The way institutional investors and individual accredited investors approach private credit often differs, driven by mandates, risk appetites, and return expectations.
Institutional investors, bound by specific investment mandates, tend to allocate substantial capital to private credit, often within defined buckets for high-yield or investment-grade exposures. Their return expectations are generally lower, with hurdle rates dictated by their own capital sources.
Individual accredited investors, on the other hand, often seek higher yields to supplement returns from other asset classes. Chu observed that these investors are frequently drawn to opportunities yielding in the mid-teens or higher, especially when considering shorter durations. However, in recent times, a "flight to quality" has emerged, with sub-10% yield deals, particularly those backed by hard assets or with low default rates, experiencing oversubscription.
"Accredited investors, for better or worse, tend to want higher-yielding products," Chu commented. "That is just sort of the nature of what they expect."
Percent: Pioneering Transparency and Accessibility
Nelson Chu founded Percent with a clear vision: to make private credit and alternative investments more approachable and transparent. The platform aims to bridge the gap for individual investors and RIAs by offering lower minimums, shorter durations, and a level of detail typically unavailable in the private markets.
"We were 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 explained.
The Percent platform emphasizes a user-friendly experience, from a straightforward sign-up process that includes identity and accreditation verification to a diverse range of investment options. For investors new to the asset class, Percent offers "try-before-you-buy" opportunities with minimums as low as $500 and short-duration investments that allow for relatively quick access to capital.
For those seeking a more diversified and hands-off approach, Percent offers "blended notes." These act as diversified baskets of investments, themed around specific strategies such as total market exposure, U.S. only, short duration, or high yield. This allows investors to gain broad exposure to the private credit market through a single product.
Underwriting and Due Diligence: The Foundation of Trust
A critical aspect of Percent’s offering is its rigorous underwriting and due diligence process. Chu highlighted that for years, he personally served as the primary underwriter, allowing the company to establish robust standards and gain deep insights into the intricacies of private credit deals.
"Private credit, historically, has been a very opaque asset class," Chu stated. "And for us, as part of the, I think, like, over 400 deals that we’ve done at this point, we’ve learned how to create almost like the market standard for a private credit."
Percent aims to bring public market-like transparency to private credit. This includes providing granular data on deal structures, underlying asset performance, obligor counts, expected default rates, currency hedging, and more. This detailed disclosure empowers investors to make informed decisions, comparing deals on a granular level and understanding the nuances of their risk and return profiles.
The platform also employs a public market-style execution process, allowing investors several weeks to conduct due diligence and place orders. This "order book" approach, where investors specify their minimum investment, maximum investment, and minimum acceptable APY, provides real-time market feedback to borrowers and underwriters, enabling more efficient and transparent pricing.
Impact Investing and Emerging Markets
Beyond pure yield generation, Percent is increasingly facilitating investments with a demonstrable impact. Chu noted that investors are using the platform to target specific sectors and geographies that align with their values.
"We have seen groups and individuals who basically say, ‘I only do international deals,’ right? Especially in emerging markets," Chu remarked. "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 focus on emerging markets highlights a significant structural need for alternative financing. In many developing economies, entrepreneurs and small businesses lack access to traditional banking services, creating a critical financing gap. Platforms like Percent enable individual investors to participate in closing this gap, providing capital that fuels economic growth and supports underserved populations, all while seeking attractive returns.
"In many ways, these countries are actually better than us technologically," Chu observed. "They bypass all of that. Versus here, you’re still writing checks to your landlord. I mean, it’s like ridiculous. So to bypass all of that and make it mobile-first and make it… and essentially meet the consumers and small businesses where they are, from a technology standpoint, is incredibly impactful."
Outlook for Private Credit
Looking ahead, the outlook for private credit remains robust. As interest rates persist at higher levels and the economy navigates potential slowdowns, the demand for flexible, yield-oriented capital is expected to continue.
Chu anticipates a strong year for private credit, with opportunities arising across various sub-sectors. Venture debt, in particular, is poised for increased demand 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 are expected to perform, with consumer credit likely offering higher yields due to increased debt levels, presenting investors with a clear risk-reward trade-off.
"Investors are definitely expecting higher yields," Chu confirmed. "So small business side too, right? That’s the other side of the non-consumer credit side. We’re seeing kind of healthy performance on that side even still."
The inherent liquidity provided by shorter refinancing cycles on the Percent platform further enhances its appeal. While not a traditional secondary market, the ability for investments to mature and be redeployed relatively quickly offers a degree of flexibility that mitigates the illiquidity concerns often associated with private markets.
For high-net-worth investors and RIAs seeking to enhance portfolio diversification, generate consistent income, and potentially access differentiated returns, private credit, facilitated by platforms like Percent, presents a compelling and increasingly accessible avenue. The ongoing evolution of this asset class underscores its growing importance in the modern investment landscape.
