Private debt is among the most popular forms of trending alternative investments. It offers investors several advantages, notably higher returns than traditional debt securities.
In addition, the wide range of offers from the underlying loans allows investors industry exposure. But how can accredited investors invest in private debt? Read on to learn the different ways to access the private debt system and its numerous advantages.
Why Private Debt?
Most investors view private debt as a safe option as it requires less liquidity and grants better yields. Unlike following a stock price down or up, private debt investments typically have fixed returns. They steadily build up returns through interest until their complete payments, allowing the investor to play a banker’s role.
Floating-rate securities also back several private credit funds, protecting the investors against interest rate spikes. Despite the illiquid reputation, investors can invest in private debt in several ways that involve segmenting the loans and paying them over a certain period, with more recurrent interest payments.
Investors now view private debt as another method of diversifying their portfolio since it has become a standing asset class. Private debt is among the easiest ways to enter certain sectors, including infrastructure debt investments.
How to Invest in Private Debt
You may be wondering, “How can accredited investors invest in private debt?” There are numerous ways to access the private debt system. However, entrants can get intimidated by its complexity. Despite this complexity, there are a few simple ways to access the asset class.
The most basic way involves joining a microcredit program (peer) as a lender. Platforms like Cadence revolve around small-scale credits, with their members assuming standing as small banks. That is the most basic class of private debt, with minimal yields and risk, enabling amateur investors to test the waters.
Some platforms allow anyone who has a private business to buy debts in other enterprises. It’s a standard way to acquire private debt and earn steady income over long periods. The process often involves buying the debts from debt holders — they can directly pay to your company. These debts are a useful asset as you can sell them yourself later.
Some debt-backed platforms that host thousands of offers are also available for potential real estate moguls. Holdfolio is one such platform on the residential aspect that focuses on real estate, private capital markets and debt deals.
On the commercial aspect, crowdfunding platforms like Peer Street open the door to high-yielding loans with real estate collateral. SuperVest is another platform that enables investors to access merchant cash advances, a popular and profitable high-turnover lending method.
Current Market Conditions of Private Debts
Most private middle-market businesses have some debt. Hence, it’s not surprising to see the private debt market expand to comprise 10-15% of private investors’ managed total assets.
Before the economic meltdown in 2008/09, banks hardly gave out loans to middle and small-market enterprises. During the economic contraction, the situation worsened: businesses with low credit history sourced for alternative investment funds from places like BDCs (Business Development Companies).
Although the market gradually improved over the past ten years, banks were still hesitant to give out loans to medium and small-scale companies. New regulations restricted banks from handing out sizable loans. In addition, the updated US Leveraged Lending Guidance and the Basel III measures further led banks into the arms of big companies.
Aside from the traditional financial institutions’ reducing role, investors are now more involved in the private debt market. In 2007, investors showed their dedication to the private debt world by contributing 60 billion dollars to alternative lending. The industry has witnessed more development ever since, causing a sporadic growth in interest.
By 2019, the total asset investments in private debt hit an $812 billion record high, with the expectation (before the pandemic) that it would be over $1 trillion in 2020. That year, the asset managers were up to 1,764 (a record high), twice the amount five years before then.
Benefits of Investing in Private Debt
The major benefits of investing in private debt include better access to infrastructure debt, asset diversification, and risk reduction.
Investors can minimize credit risks and other risks related to increasing interest rates by scaling down the fixed income holdings. The low-risk advantage has made private debt a reliable and sustainable income source for accredited investors despite the instability.
Private debt is now a widely accepted category for diversifying assets and part of several asset allocation strategies. Investors get protected against increasing interest rates due to the backing of private credit funds by securities (floating-rate).
Investors can also gain access to completely inaccessible markets through private debt. Private infrastructure debt invades up-and-coming markets such as renewable energy, opening more ways for accredited investors to diversify returns. Although hampered liquidity can affect private debt, investors’ returns usually surpass the public debt markets, partly due to greater flexibility and transparency.
The widespread illiquidity of private debt has recently been questioned. Investors can use capital invested over a long period with quarterly interest to create some form of liquidity and consistent cash flow. It will depend largely on the strategy used. Private debt liquidity can be considered “wetter” than otherwise expected.
Another benefit of private debt funds is the unitranche facilities, which enables investors to combine subordinate and senior debts in a hybrid deal. Aside from the appealing nature of the flexible terms to borrowers, the debt is relatively easy to manage compared to private equity funds, which are labor-intensive.
Private debt funds offer clear-cut benefits for accredited investors in the lending market. Portfolio diversification, low risk, and high yields are all solid attractions for every investor in the private debt world.
Other Investments for Accredited Investors
Investors can also diversify their investments and portfolio to enjoy the best of passive income investments. Some of the best alternative investments for accredited investors include hedge funds, cryptocurrencies, NFTs (Non-fungible Tokens), merchant cash advances, commodities, collectibles, and more. However, we advise investors interested in alternative investments to study the benefits and risks before delving into them.
If you’ve been asking — How can accredited investors invest in private debt? — we trust that you now have your questions exhaustively answered.
