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  • Dorian Chin

Private credit: The basics to have

1. Growing Demand

In an economic context where agility and innovation are essential, private companies in a growth or transformation phase are increasingly favoring private credit for their financing. They are turning to non-traditional lenders for capital through direct lending, seeking a solution more suited to their specific needs.

2. Defensive Income

Private loans, which are generally secure and come with variable interest rates, provide a substantial layer of protection for investors. This approach, favoring senior loans accompanied by a safety margin in the form of subordinated debt and equity, aims to secure the invested capital while generating a potentially high income.

3. Basic Allocation

Integrating private credit into a traditional investment portfolio, composed of stocks and bonds, allows for increased diversification. This strategy can significantly improve the risk/return ratio of the portfolio, by adding a stable and defensive source of income.

The Basics of Private Credit

Every business needs capital to grow, operate, acquire a competitor, or seize new market opportunities. Traditionally, businesses borrow money from commercial banks. These banks typically sell (or “syndicate”) these loans or bonds to a large group of lenders who will hold or trade these securities.

Private credit can offer businesses a more direct and efficient way to access capital. Private credit managers raise funds directly from investors and lend to corporate borrowers in transactions that often involve a private equity firm. This direct approach – without an intermediary bank – can result in greater efficiency, confidentiality, certainty of execution and flexibility in terms of structure for the borrower. For the investor, this can lead to stronger documentation, protection and ultimately more attractive returns.

Private Credit at the Heart of a Strategy?

Private credit has demonstrated its ability to improve portfolio returns, reduce volatility and increase income potential. For investors seeking a defensive position in the face of market uncertainties, interest rate fluctuations and inflation, private credit represents an increasingly attractive option.

Current Private Credit Landscape

The private credit sector is growing rapidly, driven by banking consolidation and post-financial crisis regulatory changes. Accounting for a significant portion of the U.S. non-investment grade investment loan market, private credit plays a key role in financing major deals, supported by demand for more flexible capital solutions from businesses.

Outperformance of Private Credit

Historically, private credit has outperformed traditional segments of credit, such as high-yield bonds and leveraged loans. This performance is attributed to the premium that borrowers are willing to pay for access to efficient, confidential, and flexible private capital.

Top Reasons Borrowers Choose Private Loans

  • Execution efficiency

  • Flexible structuring

  • Maintaining confidentiality

  • Greater certainty of terms

  • Fewer public disclosure requirements

Source: Blackstone

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