One term in particular has been buzzing in the ever-evolving investing landscape over the last few months: private credit. More investors than ever took to Google recently in search of more information on the asset class.

So what’s all the excitement about? Let’s unpack what private credit is, its key features, and see why it’s become a focal point in the current market landscape.

What is private credit?

Private credit is a type of debt financing provided by non-bank lenders, and not issued or traded in an open market. Transactions are negotiated directly between the lender and the borrower, allowing for customised terms and structures tailored to the specific needs of both parties. For borrowers, it provides access to fast, flexible, and confidential financing solutions not available through traditional channels.

According to BlackRock, the global private credit market could reach US$3.5 trillion in AUM by year-end 2028, up from US$1.6 trillion globally, as of March 2023.

Private credit consists of various types of loans, catering to different borrower needs. Each type of loan presents varying degrees of risk and potential returns. Typically, senior secured loans are considered safer, offering more stable yields and sitting lower on both the risk and return spectrums compared to other forms of private credit. Unsecured debt – subordinated and mezzanine financing – is positioned lower in the capital structure and commands higher yields to offset increased credit risks.

For investors, senior secured debt is an attractive option for greater portfolio diversification and higher yields compared to traditional fixed income, and with a more conservative risk-return profile than leveraged loans. Let’s focus on senior secured debt and its key features.

Key features of senior secured loans

1. Higher yields

Distributions from private credit instruments are typically structured as a base floating rate plus a spread, and are adjusted to reflect changes in interest rates. The typical spread falls within the 4.5% to 5.5% range. Given the complexity of originating private credit deals, lenders receive higher compensation, translating into attractive returns for investors.

2. Risk-adjusted performance

Historically, private credit strategies have offered strong risk-adjusted returns, making them a powerful complement to traditional fixed income strategies. It’s also important to note that performance can vary depending on a fund manager's expertise. Key factors to consider when evaluating potential managers include the types of borrowers and assets they lend against, their placement within the capital structure, and their historical performance across economic cycles.

Source: Mercer, Thomson Reuters Datastream (ICE BofAML US High Yield Master II, S&P Leveraged Loan), Burgiss (US Private Debt); Note: Data is annualised to June 30, 2021

3. Capital preservation

Senior secured loans offer downside protection due to their collateral backing and seniority in the capital structure. In the event of a default, private credit investors with a senior secured position have a priority claim on the borrower's assets.

4. Diversification

Private credit investments are less correlated with other asset classes and provide access to a wider range of borrowers not available to the public markets. These factors allow investors to further diversify their portfolios, mitigating overall risk.

Private credit is also associated with lower volatility, especially when compared to public bond markets. Over the past 15 years, senior secured loans have outperformed relative to similar types of debt.

Starting your Private Credit portfolio with StashAway

Our private credit product is available to StashAway Reserve clients. StashAway Reserve empowers Professional Investors (PIs) to access highly personalised wealth advisory and private investment opportunities – we believe that private market investments shouldn’t only be for the well-connected and ultra-wealthy.

If you'd like to learn more about StashAway Reserve, visit our website, or reach out to one of our Wealth Advisors.