Key Takeaways
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Private credit involves lending to private companies through non-bank channels, often with bespoke structures and higher yields.
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It offers portfolio diversification and customisable terms, appealing to HNWIs, institutions, and family offices with long-term horizons.
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Key risks include illiquidity, borrower default, and lower regulatory oversight, making governance and deal selection critical.
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Investors should approach private credit with clear goals, expert support, and access to ongoing performance monitoring.
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Partnering with a firm like Kingsbury & Partners helps ensure deals are aligned to investor needs and evaluated with rigour.
Introduction
Private credit has emerged as a compelling asset class for investors seeking steady income and portfolio diversification. Unlike traditional fixed-income investments, private credit focuses on lending to private companies, often through bespoke arrangements tailored to specific borrower needs. If you’re considering stepping into the world of private credit, here are the essentials you need to know.
What Is Private Credit?
Private credit refers to debt financing provided by non-bank lenders to private companies or projects. These loans are typically not traded on public markets, offering a higher degree of privacy and flexibility for both lenders and borrowers. Private credit investments may include direct lending, mezzanine financing, distressed debt, and real estate debt, among others.
Investors are drawn to private credit because it often provides higher returns compared to traditional bonds, compensating for its illiquidity and higher risk profile.
Key Benefits
- Attractive Yields:
Private credit often offers yields that surpass those of public fixed-income instruments. This is particularly appealing in low-interest-rate environments where traditional income streams may fall short. - Portfolio Diversification:
Adding private credit to a portfolio can reduce overall volatility. The asset class is less correlated with equity markets, which can act as a buffer during market downturns. - Customisation:
Unlike public bonds, private credit deals can be customised to align with the lender’s risk appetite, offering greater control over investment terms and security.
Risks to Consider
While the rewards of private credit investing are compelling, it’s crucial to understand the risks involved.
- Illiquidity:
Private credit investments are typically long-term and cannot be easily sold. This makes them less suitable for investors who may need quick access to their capital. - Default Risk:
As private credit often targets borrowers who may not qualify for traditional bank loans, there’s an elevated risk of default. Conducting thorough due diligence is essential. - Regulatory Risks:
Private credit is less regulated compared to public debt markets, which can create additional challenges for investors who rely on a strong governance framework.
Who Should Invest in Private Credit?
Private credit is best suited for experienced investors who understand the nuances of alternative investments. It often appeals to:
- High-Net-Worth Individuals (HNWIs): Seeking diversification and enhanced yields.
- Institutional Investors: Such as pension funds, which have a long-term investment horizon.
- Family Offices: Looking for bespoke opportunities tailored to their objectives.
If you’re considering private credit, ensure you have the risk tolerance and patience to navigate the long investment horizons and potential volatility.
How to Get Started
- Partner with Experts:
Working with a trusted wealth management firm or private credit specialist ensures you have access to quality deals and robust due diligence. Look for firms with a strong track record in the asset class. - Define Your Goals:
Consider why you’re investing. Are you looking for income, diversification, or capital preservation? Your goals will determine which opportunities are best suited for your needs. - Understand the Structure:
Each private credit deal is unique. Review loan agreements carefully, including covenants, repayment terms, and security packages. - Monitor Performance:
Unlike public investments, private credit requires ongoing oversight. Ensure you have access to regular performance updates and reports.
The Bottom Line
Private credit offers an exciting opportunity for investors seeking income and diversification, but it comes with unique challenges that require careful consideration. By partnering with knowledgeable professionals and approaching each investment with a clear strategy, private credit can become a valuable addition to your portfolio.
Kingsbury & Partners helps clients identify, assess, and monitor private credit opportunities—with transparency, governance, and alignment at the core.
→ Speak to us today to explore how private credit can complement your portfolio
