As the alternative investment landscape continues its rapid expansion, private credit has emerged as a significant growth sector, often drawing parallels with the more prominent private equity. This burgeoning asset class offers compelling opportunities for both sophisticated institutional investors and individual high-net-worth (HNW) individuals and their advisors. Nelson Chu, founder and CEO of Percent, a leading private credit platform, recently shared his insights on the evolving private credit market and how investors can strategically incorporate it into their portfolios during an appearance on The Alternative Investment Podcast with host Andy Hagans.
The enduring appeal of income generation remains a cornerstone of investment strategy, particularly in the current economic climate. Chu emphasized that, contrary to any notion of income being outdated, its pursuit is more critical than ever. "I have yet to meet one [investor] who says, ‘No, Andy, I hate income, and income is out of style,’" Hagans quipped, underscoring the universal demand for steady returns.
From Rebellious Youth to Fintech Pioneer: Nelson Chu’s Journey
Nelson Chu’s entrepreneurial spirit was evident from a young age, a stark contrast to the traditional career paths his parents envisioned. He recounted a rebellious youth, eschewing Ivy League aspirations for a more unconventional route. His initial foray into traditional finance, while brief, proved instructive, not for its financial acumen, but for its lessons in corporate bureaucracy and professionalism. "I learned about red tape, bureaucracy, and politics," Chu remarked about his early finance experience. "No regrets either way. I think it actually teaches you a lot… It teaches you about perfectionism. It teaches you about professionalism. Email writing is an art, no matter what."
Following his early finance experience, Chu founded a consulting company that empowered other entrepreneurs to build their businesses. This venture, though not directly finance-related, consistently attracted fintech clients, drawing him back into the financial sector. "Even though I tried to avoid finance, I kept going back to finance and it worked out totally fine," he stated. This path eventually led him to co-found Percent in 2017-2018, recognizing a significant market gap for making private credit and alternative investments more accessible. The goal was to offer these opportunities with shorter durations, lower minimums, and attractive yields, a vision that has come to fruition, especially in the current higher-rate environment.
The Private Credit Imperative in a Shifting Economic Landscape
The contemporary economic environment, characterized by persistent inflation, has fundamentally altered the investment calculus. With Consumer Price Index (CPI) figures remaining elevated, traditional safe havens like Certificates of Deposit (CDs) and Treasuries, while offering improved yields compared to recent years, often fail to outpace inflation. This erodes the real value of capital, prompting investors to seek alternative avenues for growth.
"When inflation is 2%, you can kind of squint and round that down to zero, right? But when it’s 6%, 7%, 8%, 9%… you’re not beating inflation. So you gotta find something else at that point to be able to offset all of that," Hagans observed. The tax implications of these returns further compound the challenge, as nominal gains are taxed even when real returns are negative.
Understanding the Asset Class: The Case for Private Credit
Despite its growing prominence, many high-net-worth investors and RIAs remain underexposed to private credit. Chu explained that the asset class’s maturity is relatively recent, gaining significant traction in the wake of the 2008 Global Financial Crisis. The retrenchment of banks from lending to consumers and small businesses created an opening for nonbank lenders, which, in turn, fueled the demand for capital from private credit funds.
"It is a very recent phenomenon, call it 12, 14 years, give or take," Chu noted. He suggested that while many individuals may not be directly aware of their interaction with private credit, they have likely encountered it through various financial products and services. The traditional 60/40 portfolio, long a staple for investors, is increasingly considered obsolete due to the evolving market dynamics and the proliferation of investable alternatives. Real estate has traditionally served as a primary alternative, but private credit is now establishing its own distinct and vital role.
The Two Pillars of Private Credit: Asset-Backed and Corporate Debt
Private credit can be broadly categorized into two main segments: asset-backed lending and corporate debt.
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Asset-Backed Lending: This involves securitizing cash flows generated from interest-bearing assets, most commonly loans. Nonbank lenders, in sectors like consumer and small business finance, package pools of loans to create securities for investors. These structures often incorporate mechanisms to protect investor principal, such as advancing a percentage of the total loan value and implementing risk mitigation strategies against defaults. Examples include financing platforms like SoFi and Affirm, as well as newer entrants like Capchase and Wayflyer.
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Corporate Debt: This segment involves lending directly to individual companies. The risk profile here is tied to the specific company’s financial health and growth prospects. This can range from venture debt, where loans are provided to early-stage, often venture capital-backed companies, to middle-market lending, which finances established businesses with significant cash flows. This category encompasses single counterparty risk, requiring investors to have confidence in the borrower’s long-term viability.
Chu highlighted that while both segments have experienced growth, the asset-backed side has seen a notable surge recently, driven by the expansion of nonbank lenders.
Navigating the Risk-Return Spectrum
The private credit market offers a wide spectrum of risk and return profiles, akin to the public bond market. Investment-grade equivalents in private credit might offer yields in the high single digits, while higher-risk segments, comparable to high-yield or distressed debt, can command significantly higher returns.
"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 explained. "You could have a very early-stage lender… versus a company that is about to go public… That’s gonna get single-digit cost of capital." Conversely, venture debt, while potentially riskier due to the unproven nature of some startups, can offer equity warrants as a sweetener, providing upside potential.
The premium for investing in private credit over liquid alternatives is typically attributed to the illiquidity premium. Chu estimates this can range from 50 to 150 basis points for investment-grade-like private credit, widening significantly for higher-yield opportunities. This premium reflects the trade-off for locking capital for extended periods.
Institutional vs. Individual Investors: Divergent Strategies
The investment approaches of institutional investors and individual accredited investors in private credit often differ, shaped by their respective mandates, risk tolerances, and capital deployment strategies.
Institutional investors, bound by strict investment mandates, tend to invest in larger tranches and focus on specific sectors or risk profiles to meet diversification goals. Their yield expectations are generally lower, often dictated by their limited partners (LPs) and hurdle rates. For instance, an institutional investor might target a 3-4% return on investment-grade private credit, considering anything above 5-6% a success.
Individual accredited investors, on the other hand, often seek higher yields to supplement returns from other asset classes. Historically, they have gravitated towards investments offering mid-teen or higher annual percentage yields (APYs). However, Chu observed a recent "flight to quality" even among individual investors, with a growing appetite for lower-yield, but structurally sound, "quality" deals, especially in the current economic climate. This shift reflects a maturing risk management perspective, where investors prioritize capital preservation alongside attractive returns.
Percent Platform: Democratizing Private Credit Access
The Percent platform aims to bridge the accessibility gap in private credit, offering a sophisticated yet user-friendly interface for investors. The platform emphasizes transparency and choice, providing investors with access to a diverse range of deals and thematic investment options.
The user journey on Percent begins with a straightforward sign-up process, including identity verification and accreditation checks, typically completed within a day. Investors can then link their bank accounts and begin exploring opportunities.
A key feature of the Percent platform is its "try-before-you-buy" model, offering deals with low minimums (as low as $500) and short durations (sub-nine months). These short-term investments allow new investors to experience the platform, observe interest payments, and witness capital return within a few months, building confidence before committing larger sums.
For investors seeking a more hands-off approach, Percent offers "blended notes." These are diversified baskets of investments curated around specific themes, such as a "total market" option that invests across all platform deals, or thematic notes focused on short duration, high yield, or specific geographies. These blended notes function similarly to index funds, offering automated allocation and a "set-it-and-forget-it" investment strategy.
Underwriting and Due Diligence: The Foundation of Trust
The integrity of any investment platform hinges on its rigorous underwriting and due diligence processes. Percent acts as the sole underwriter for deals on its platform, a deliberate strategy to establish market standards and provide unparalleled transparency.
"Private credit, historically, has been a very opaque asset class," Chu stated. "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."
Percent addresses this opacity by providing granular data and comparative analysis for each deal. Investors can scrutinize aspects like advance rates, portfolio expected default rates, cash control accounts, and currency hedging for non-U.S. deals – metrics typically found in public markets but rarely in private credit. This transparency empowers investors to make informed decisions based on detailed structural and performance data.
The platform is also evolving to incorporate community feedback. A forthcoming feature will make investor questions and internal team discussions public, fostering a forum for deal analysis and creating a more collaborative investment environment.
Market Dynamics and Investor Sentiment
The private credit market, while robust, is not immune to broader economic influences. Chu observed a correlation between public equity market performance and investor participation in private credit. When public equities perform well, leading to a perception of increased wealth, private credit deals tend to see higher subscription rates. Conversely, during downturns in public markets, private credit offerings may experience under-subscription, indicating a more risk-averse sentiment.
"This side of the market is very, very subject to the whims of public equities," Chu noted. This dynamic underscores the importance of having a diversified platform like Percent, offering various asset classes and strategies to cater to different market conditions and investor preferences.
Impact Investing and Emerging Markets: A Growing Frontier
Beyond traditional yield-seeking, a segment of investors is increasingly interested in impact investing – using capital to generate positive social or environmental outcomes alongside financial returns. Percent’s platform facilitates this through its diverse range of sectors and geographies.
Chu highlighted how investor demand can serve as a real-time indicator of market health and emerging trends. For instance, during the COVID-19 pandemic, demand for e-commerce and mobile gaming finance surged, leading to oversubscriptions for those deals. Conversely, small business lending, directly impacted by lockdowns, saw increased yield expectations.
A particularly compelling area for impact investing is emerging markets. Chu pointed to entrepreneurs in these regions who, inspired by innovations in Western banking, are building new financial infrastructure for underserved populations. "In emerging markets, this kind of product is a structural need. It’s not a nice to have. It’s in a very important part of the infrastructure for SMBs, for entrepreneurs in these emerging markets," Hagans emphasized. Percent’s platform enables investors to directly finance these initiatives, supporting economic development while achieving financial returns.
The Outlook for Private Credit in 2023 and Beyond
Projections for the private credit market in 2023 remain optimistic, with many analysts anticipating continued strong performance. As inflation potentially moderates and interest rates stabilize, the asset class is expected to remain attractive to investors seeking consistent income and risk-adjusted returns.
Within this landscape, both venture debt and asset-backed lending are poised for continued relevance. The current environment, where venture capital funding has tightened, increases the demand for venture debt as a bridging solution for companies seeking to reach their next funding round. On the asset-backed side, both small business and consumer lending present opportunities, with consumer credit likely commanding higher yields due to increased debt levels in developed economies.
Chu stressed that while opportunities abound, thorough due diligence and a clear investment thesis are paramount. "It really is a case by case, do your own research, have your own thesis," he advised. Investors can leverage platforms like Percent to monitor investment performance, rebalance portfolios, and adapt to evolving market conditions.
Inherent Liquidity: A Key Differentiator
A common perception of private credit is its inherent illiquidity. However, Chu countered this by highlighting Percent’s focus on "inherent liquidity," achieved through shorter refinancing cycles. Unlike traditional public debt with long maturities, many deals on Percent have durations of nine months or less, with refinancing opportunities within three months. This structure allows investors to access their capital more regularly, providing a degree of liquidity that is often underestimated. For longer-term, diversified investments, the blended notes offer a more extended investment horizon.
Conclusion: Private Credit as a Strategic Portfolio Component
Nelson Chu’s insights underscore that private credit is no longer a niche asset class reserved for institutional behemoths. Platforms like Percent are democratizing access, empowering individual investors and RIAs to strategically incorporate private credit into their portfolios. By offering transparency, choice, and a commitment to rigorous underwriting, Percent is helping to redefine how wealth is generated and preserved in an increasingly complex financial world. The "private credit revolution" is not just about accessing alternative income streams; it’s about building resilient portfolios and, in many cases, driving tangible impact in economies around the globe.
For those seeking to learn more about the Percent platform and its offerings, the company’s website, Percent.com, provides comprehensive information. Investors can also reach out to their investor relations team directly via email at [email protected]
