Introduction
In the world of private markets, investment structures form the foundation of success—or failure. For High-Net-Worth Individuals, intermediaries, and institutional investors alike, understanding the nuances of investment structures is essential to achieving long-term financial objectives. From corporate bonds and loan notes to credit-linked notes (CLNs), the structure of an investment can significantly influence its risk profile, returns, and overall security.
At Kingsbury & Partners, we’ve made it our mission to evaluate and deliver the most robust investment opportunities. Through extensive due diligence, we’ve seen first-hand how the structure of an investment can either safeguard or expose investors. Among these options, credit-linked notes (CLNs) have consistently stood out as the most secure and transparent solution in private credit.
Private Credit Structures: What’s Available?
Private credit encompasses a variety of structures, each designed to meet different investment objectives and risk appetites. Some of the most common structures include:
- Corporate Bonds: These debt instruments are issued by companies seeking to raise capital. They offer fixed interest payments and are often considered a relatively stable option, though their security depends heavily on the issuer’s creditworthiness.
- Loan Notes: A popular structure in private credit, loan notes are often short- to medium-term debt instruments. While they can provide high returns, they are frequently associated with higher default risks and limited transparency, particularly when issued by smaller or less-established entities.
- Credit-Linked Notes (CLNs): CLNs are structured financial instruments that link returns to the credit performance of a specific reference entity, such as a corporate or sovereign bond. These notes combine the benefits of customisable risk exposure and yield optimisation, making them an increasingly preferred choice in private credit.
What We Uncovered in Our Due Diligence Process
Through rigorous due diligence, we uncovered alarming trends in the private credit market that every investor should be aware of. Many of the offerings we reviewed fell short of even the most basic standards of security and transparency. These aren’t just minor oversights—they’re fundamental flaws that can expose investors to unnecessary and often avoidable risks.
- Loose Covenants That Fail to Protect Investors
Many loan notes and corporate bonds we examined were riddled with covenants so weak they barely offered any real protection to investors. These watered-down agreements leave the door wide open for issuers to breach terms without consequences, ultimately putting investor capital at significant risk. - Opaque Structures That Obscure the Truth
Transparency is the backbone of sound investment, yet it was glaringly absent in much of what we reviewed. Many offerings lacked clear disclosures about the underlying assets, repayment terms, and governance structures, effectively leaving investors in the dark. This kind of opacity is a breeding ground for mismanagement and unchecked risk. - Structural Fragility That Amplifies Risk
Instead of robust mechanisms to mitigate risks, many investments displayed alarming fragility. Inadequate protections against defaults, market downturns, or counterparty risks were common themes. For investors, this translates to exposure that is far greater than advertised. - Misaligned Priorities
Time and again, we saw structures designed to serve the issuers more than the investors. Instead of protecting capital and delivering reliable returns, many investments prioritised short-term gains for the issuers at the expense of long-term stability for investors.
A Vital Consideration for Investors
The structure of an investment is not just a technical detail—it is a fundamental determinant of its success. In private credit, where investments often lack the regulatory safeguards of public markets, the choice of structure can mean the difference between financial growth and capital loss.
- Risk Management: A well-structured private credit investment mitigates risks at every level, offering protections against default, market volatility, and liquidity concerns. Conversely, weak structures amplify these risks, leaving investors vulnerable.
- Transparency: In a market that often operates behind closed doors, transparent structures give investors a clear view of where their money is going and how returns are generated. Without this clarity, investors are essentially flying blind.
- Return Optimisation: The right structure ensures that returns are maximised without taking on disproportionate risk. Poorly structured investments, on the other hand, can erode returns through inefficiencies, mismanagement, or hidden costs.
For investors in private credit, understanding the structure of an investment is just as important as understanding its underlying assets. A robust structure ensures that your capital is protected, your returns are optimised, and your risks are managed.
The Gold Standard: Credit Linked Notes
Private credit offers a wealth of opportunities, but not all investment structures are created equal. Among the various options available, credit-linked notes (CLNs) have emerged as the benchmark for reliability, transparency, and performance. Their unique attributes make them an unrivalled choice for investors seeking security and consistency in an increasingly competitive market.
What sets CLNs apart is their ability to offer a structured approach to private credit investing. Unlike traditional loan notes or corporate bonds, which often lack robust safeguards, CLNs are designed with a clear framework that links returns to the credit performance of a specific reference entity. This transparency ensures investors understand where their money is going and what factors influence their returns—critical in a market where opaque structures can lead to unforeseen risks.
CLNs also shine in their ability to mitigate risk effectively. Built-in protections reduce exposure to default and counterparty risks, offering a level of stability that is rarely matched by other structures. This makes them particularly attractive to investors looking for safer alternatives without sacrificing returns.
Building Strong Foundations in Private Credit
Private credit offers immense opportunities, but only for those who approach it with the right tools and understanding. At Kingsbury & Partners, we are committed to ensuring our clients navigate this market with confidence, armed with investments built on sound, secure structures.
By choosing robust frameworks like credit-linked notes, investors can unlock the full potential of private credit while protecting their wealth from unnecessary risks. Contact us today to learn how we can help you structure your investments for success.
When it comes to private credit, the structure is everything. Let Kingsbury & Partners guide you to smarter, safer investment decisions.