Corporate entities keep searching for financing options to secure capital. Gone are the days when traditional bank loans were the only way corporate entities could secure outside capital. Besides corporate entities, individuals are also exploring new ways of getting funds. In the past few years, private credit has become a reliable source for companies and individuals to secure funds. Besides corporate entities, lenders have also benefited from private credit, as it offers a fixed stream of income. For the same rationale, private credit has become an asset class for lenders. Read on to understand the rise of private credit as an asset class.
Are you familiar with the concept of private credit?
Private credit, also known as non-bank lending, is a financing option offered by non-banking institutions. It is offered to organisations and individuals who cannot secure traditional bank loans. Some corporate entities might not have access to debt markets. In such a case, they can depend on non-bank lending. Financial institutions cannot fulfil the demands of every corporate entity or individual. Luckily, non-bank lending is available to help the customers left behind by financial institutions. Besides private firms, institutional investors can offer funds to corporate entities and individuals. Non-bank lending includes a fixed interest rate throughout the loan tenure. The borrower also returns the principal amount throughout the loan tenure.
Non-bank lending occurs in multiple forms, depending upon the choice of borrowers and lenders. Here are the different forms of non-bank lending:
- Corporate entities can go for direct lending. Private lenders will extend funds to a company for expansion, M&As, corporate restructuring, and other activities. Both borrowers and lenders can negotiate the terms of the loan before moving forward.
- Mezzanine debt is another option for companies. It has a higher interest rate for the borrower. Also, the lender might take a part in the borrower’s success.
- Companies on the verge of bankruptcy or under financial distress might issue bonds at a discounted rate. Lenders might offer distressed debt and hope for a turnaround to earn returns.
- Some companies might require non-bank funds for special situations. For example, corporate entities might require funds for buyouts, recapitalization, and other situations.
Do you understand an asset class?
Before delving deeper, it is essential to understand the meaning of an asset class. An asset class includes a group of investments having similar characteristics. For example, all investments including properties might fall under the real estate asset class. Investors rely on different asset classes to generate returns. With the help of asset classes, investors can indulge in portfolio diversification. They can invest in different asset classes and protect them from risks. The categorization of different investments in classes also allows investors to indulge in research. Investors know that investments in a single asset class have the same properties. It allows them to follow the same risk management and investment strategy for an asset class. Let us now understand how private credit has evolved as an asset class.
Evolution of private credit as an asset class
Private credit might not be an asset class on its own, but it has become a part of an existing asset class. You can include non-bank lending under the umbrella of fixed-income assets. Fixed-income assets include debt securities, primarily bonds. Bonds offer fixed income to investors at regular intervals. In the same way, private credit offers interest income to the lender throughout the loan tenure. Besides non-banking organizations, institutional investors also offer loans to companies and individuals. These investors earn a fixed income through direct lending, mezzanine debt, and other non-bank lending.
Private credit is an opportunity for investors to earn high yields. For instance, institutional investors can offer mezzanine debts to companies and earn high returns. Regulatory changes in the past few years have also increased the hype of private credit among investors. Since private credit isn’t limited to non-banking institutions, it can be considered an asset class.
In a nutshell
Investors can turn to private credit to generate high returns. They can offer loans to corporate entities and earn regular interest payments. It will provide them with an income stream, similar to fixed-income investments. Search for reliable private credit options right away!
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