The alternative investment landscape is experiencing a significant expansion, with private credit emerging as a compelling growth story alongside the more frequently discussed private equity sector. As institutional and individual investors alike seek to diversify their portfolios and achieve enhanced returns, private credit is increasingly recognized for its potential to deliver attractive risk-adjusted performance. This burgeoning asset class is no longer the exclusive domain of large institutions; platforms like Percent are actively working to democratize access, enabling high-net-worth individuals and registered investment advisors (RIAs) to tap into its opportunities.
Nelson Chu, the founder and CEO of Percent, recently joined Andy Hagans, host of The Alternative Investment Podcast, to delve into the intricacies of the private credit market and the innovative platform Percent offers. Their discussion provided valuable insights into how sophisticated investors can leverage private credit to navigate the current economic climate and build generational wealth.
The Evolving Investment Landscape and the Case for Private Credit
The traditional 60/40 portfolio, once a cornerstone of investment strategy, is increasingly being questioned in today’s volatile economic environment. With persistent inflation eroding the purchasing power of cash holdings and fixed-income yields struggling to keep pace, investors are actively seeking alternatives that can provide a more robust income stream and capital preservation.
"Income never goes out of style," a sentiment echoed by both Hagans and Chu, encapsulates the enduring appeal of assets that generate consistent returns. In an era marked by elevated inflation rates, where even traditional safe havens like Certificates of Deposit (CDs) and Treasuries may offer yields that fall short of inflation, the need for alternative income sources becomes paramount. For high-net-worth individuals and family offices, where tax efficiency is a critical consideration, the nominal returns from taxable fixed-income investments can be further diminished, making tax-advantaged or higher-yielding alternative strategies all the more attractive.
Chu highlighted that private credit as a widely understood asset class gained significant traction primarily after the 2008 global financial crisis. The subsequent retrenchment of traditional banks from lending to consumers and small businesses created a vacuum, which was filled by non-bank lenders. These entities, often financed by venture capital and supported by credit funds, have become crucial drivers of economic growth, particularly for small and medium-sized enterprises (SMEs) and individual consumers.
"It is a very recent phenomenon, call it 12, 14 years, give or take," Chu explained, referring to the rise of private credit as a distinct investment category. "And so, it makes sense that the average person either hasn’t heard of it or hasn’t really invested in it, but the reality is they’ve probably interacted with it in some way, shape, or form."
Understanding the Spectrum of Private Credit
Private credit encompasses a broad range of lending activities outside of public markets. Chu elaborated on two primary arms of this asset class: asset-backed lending and corporate debt.
Asset-backed lending often involves the securitization of cash flows generated by pools of loans, such as consumer loans or small business loans. This structure can offer investors a degree of principal protection, often through over-collateralization, and a more predictable income stream derived from the underlying interest payments. Examples of entities participating in this space include fintech companies like SoFi and Affirm, as well as newer players like Capchase and Wayflyer, which provide financing solutions to businesses.
Corporate debt, on the other hand, involves lending directly to individual companies. This can range from venture debt, which supports early-stage companies with high growth potential, to middle-market lending, providing capital to established businesses. The risk and return profiles within corporate debt can vary significantly, depending on the financial health, growth prospects, and maturity of the borrowing company.
The perceived risk spectrum within private credit is wide, mirroring that of public markets. At one end, highly secured loans with strong collateral and predictable cash flows might be considered akin to investment-grade corporate bonds. At the other end, loans to early-stage or distressed companies with less certain repayment prospects could be comparable to high-yield or "junk" bonds. Chu noted that investors can typically expect an "illiquidity premium" for investing in private credit compared to their liquid counterparts, reflecting the longer lock-up periods and reduced ease of trading. This premium can range from 50 to 150 basis points for investment-grade-like exposures and widen considerably for higher-yield opportunities.
The Role of Sophisticated Managers and the Blurring Lines
Sophisticated alternative investment managers, including those specializing in real estate, often incorporate private credit strategies into their offerings. This dual approach allows them to remain flexible across market cycles, deploying capital to either equity or credit opportunities as conditions dictate. Chu pointed out that in many scenarios, these managers can leverage both their equity and debt capabilities to enhance investment outcomes, effectively controlling more of the capital stack.
The current environment, marked by rising interest rates, has presented challenges for some real estate investments, leading to increased investor interest in private credit. Major players like Blackstone, KKR, and Ares, with their diversified offerings, have seen their private credit funds outperform other strategies, attracting significant inflows and demonstrating resilience. PitchBook data from the latter half of 2022 indicated that private credit ranked third in terms of investor demand, underscoring its growing importance.
Percent: Democratizing Access to Private Credit
Nelson Chu founded Percent with a clear vision: to make private credit and alternative investments more accessible to a broader range of investors. He identified a market gap where shorter durations, lower minimum investment requirements, and attractive yields were not readily available to the average investor.
The Percent platform offers a streamlined process for accredited investors and RIAs to access private credit opportunities. After a straightforward sign-up and identity verification process, including accreditation verification, investors can link their bank accounts and begin exploring available deals. A key feature of Percent’s offering is its commitment to providing choice and flexibility.
"We try and, to my point earlier around optionality, give as much optionality as possible for investors," Chu stated. The platform often features "try-before-you-buy" options with minimums as low as $500 and short-duration investments that can be refinanced within a few months. This allows new investors to gain a feel for the asset class and the platform’s mechanics before committing larger sums.
For investors seeking a more diversified and hands-off approach, Percent offers "blended notes." These are essentially diversified baskets of investments curated around specific themes, such as a "total market" option that includes every deal on the platform, or thematic notes focusing on short duration, high yield, or specific geographies. These blended notes are designed to offer a "set-it-and-forget-it" mentality, providing diversified exposure and mitigating the administrative burden of managing numerous individual investments.
Transparency and Standardization: Percent’s Competitive Edge
A significant challenge in the private credit market has historically been its opacity. Investors in traditional private credit funds often receive limited transparency into the underlying assets and deal structures. Percent aims to disrupt this by bringing a high degree of transparency and standardization to the process.
Chu explained that Percent acts as a rigorous underwriter, ensuring that only high-quality deals reach the platform. Over the past three to four years, the company has processed over 400 deals, allowing them to establish market standards for private credit structures. This includes detailed disclosures on obligor counts, portfolio expected default rates, advance rates, currency hedging, and other crucial risk factors that are typically standard in public markets but often obscure in private ones.
The platform also provides standardized reporting on underlying asset performance, enabling investors to compare the performance of different borrowers side-by-side. This level of transparency empowers investors to make more informed decisions regarding deal structure and asset performance, aligning with their individual risk tolerance and investment theses.
Furthermore, Percent has adopted a public market-style execution process for its deals. Investors have several weeks to conduct due diligence and submit orders, including specifying their minimum and maximum investment amounts and their minimum acceptable Annual Percentage Yield (APY). This "order book" approach allows underwriters and borrowers to see real-time market demand and price their offerings accordingly, fostering a more efficient and transparent pricing mechanism.
Navigating the Macroeconomic Outlook for Private Credit
Looking ahead, the outlook for private credit remains robust, even as inflation shows signs of moderating. Projections suggest another strong year for the asset class, driven by continued demand and the ongoing need for financing across various sectors.
Chu highlighted the resilience of venture debt, noting that in an environment where venture capital funding has become more challenging, companies are increasingly turning to debt financing to bridge the gap to their next equity round. This creates opportunities for investors willing to take on the associated risks, which are often compensated with higher yields.
On the asset-backed side, both small business and consumer lending are expected to see continued activity. While consumer credit may present higher perceived risk due to increased credit card debt and potential challenges in auto loan performance, it is likely to be priced accordingly, offering higher potential returns. Small business lending, historically resilient, is expected to perform well, particularly in emerging markets where it addresses a structural need for financing for entrepreneurs and under-banked populations.
Chu emphasized that while some sectors may carry higher perceived risk, private credit markets are generally characterized by their liquidity. "With credit markets, whether it’s public or private, it doesn’t matter. They never stay illiquid for long. Like, there is always a price that someone’s willing to take that feels like it’s the right risk for them," he noted.
The inherent liquidity of Percent’s platform, derived from shorter refinancing cycles rather than a traditional secondary market, allows investors to enter and exit positions with relative ease. This addresses the common concern about the illiquidity often associated with private markets.
Impact Investing and Global Opportunities
Beyond pure financial returns, Percent’s platform also facilitates impact investing. By offering a diverse range of global opportunities, including in emerging markets, investors can align their capital with their values. Chu shared anecdotes of investors who focus exclusively on international deals, particularly in regions where access to basic banking services is limited. These investors aim to support lenders who provide capital and access to under-banked populations, fostering economic development and financial inclusion.
The platform’s ability to cater to these specific theses, whether it’s focusing on international consumer lending to the under-banked or supporting e-commerce and mobile gaming companies that experienced surges in demand during the pandemic, underscores its commitment to providing investors with choice and control.
"The name of the game here for us is always to give investors that freedom and optionality to decide what’s suited for them," Chu concluded. "And as long as we always have that option, you’re gonna see these little scenarios emerge from investors who have certain theses."
Nelson Chu’s insights underscore the growing significance of private credit as a vital component of a diversified investment portfolio. Platforms like Percent are not only opening doors to this lucrative asset class for a wider audience but are also setting new standards for transparency and accessibility in the alternative investment space. As the market continues to evolve, private credit is poised to remain a key driver of wealth creation for sophisticated investors navigating the complexities of the modern financial landscape.
For those interested in learning more, Percent’s platform can be accessed at Percent.com, with their investor relations team available for inquiries.
