The Benefits of a Private Credit Allocation

The Benefits of a Private Credit Allocation

Posted on Jan 16th, 2023

The Benefits of a Private Credit Allocation for Investors

Private credit can be a great investment option for investors seeking higher returns, diversification, and control.

Firstly, private credit investments can offer higher returns compared to traditional investments such as stocks or bonds. This is because private credit investments often involve lending to companies or individuals who may not have access to traditional sources of funding, and therefore may be willing to pay higher interest rates to borrow money. For example, a private credit fund may lend private debt to a small business that is unable to get a loan from a traditional bank or access public markets due to a lack of collateral or flexibility on the terms needed. The higher interest rate on the loan helps compensate the investor for taking on additional risk and providing such flexibility.

Secondly, private credit investments can offer diversification benefits to an investment portfolio. This is because empirical evidence has shown private credit investments to be less correlated to the performance of the stock or bond markets. In other words, as an asset with greater downside protection, the value of private credit investments may not rise and fall in the same way as stocks or bonds, which can help to smooth out overall portfolio returns. For example, during an economic downturn, the stock market may decline while the demand for private credit may increase as businesses seek alternative sources of funding due to a lessening of overall liquidity.

Thirdly, private credit investments can offer a level of control and flexibility that is not always possible with other types of investments. For example, because of findings during due diligence private credit investors may negotiate specific terms and conditions of a loan so that the risk reflects a commercially reasonable reward. This will include the interest rate, repayment schedule, and the collateral with tangible value sought for downside protection. This allows the investor to customize their investment to meet their specific risk tolerance and return objectives.

Despite all the challenges faced in public and private markets in 2022, most institutional investors were happy with private debt1. Preqin’s latest investor survey showed that investors continue to favor private debt for its diversification benefits, capital preservation, and reliable income stream. Investors believe that private debt is the most fairly valued asset class when compared to all other alternative asset classes. The key benefits are floating rate exposure (yield with inflation protection) and downside protection (capital preservation).

Overall, private credit can be a good investment option for investors looking to increase their potential returns, diversify their portfolios, and have more control over their investments. Over the long term, 10%+ yields are achievable for conservatively structured (first and second lien) investment quality secured loans with experienced private equity sponsors or entrepreneurial shareholder groups contributing significant equity to our transactions. High-quality businesses, floating rate returns (defensive relative to a rising-rate environment), excellent loan-to-value, strong financial covenants, and top-tier equity ownership all point to a very constructive and conservative world for private credit managers. Public market volatility, black swan, and/or interloper uncertainty have also reinforced the virtues of private debt for many institutions. The asset class is much less correlated to headline risks and offers a diversified source of income and total return potential, along with interest rate protection for enhanced fixed income. Private debt is very well suited for today’s investing landscape.

About Bond Capital
Bond Capital is an award-winning private credit fund. As a direct lender, Bond Capital provides advice and money across the entire risk curve. Bond Capital secured structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation. Across multiple cycles and for over 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America