A Brief Look at the Private Credit Markets

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Takeaways:

  • Private credit is an asset class defined by non-bank lending where the debt is not issued or traded on the public markets.
  • Private credit can also be referred to as "direct lending" or "private lending". Private credit has been one of the fastest-growing asset classes in the recent years.

Private credit is an asset class defined by non-bank lending where the debt is not issued or traded on the public markets. Private credit targets the ownership of high-yielding corporate, physical, or financial assets held within a private fund partnership structure. Private credit can also be referred to as "direct lending" or "private lending". Private credit has been one of the fastest-growing asset classes in the recent years.

‘Private Credit Markets’ can be broadly classified, and sub-divided into these strategies for investment:

Capital Preservation Strategies

Capital preservation strategies include senior debt and sponsor-oriented mezzanine funds. Returns flow primarily from annual interests paid on bonds and fees. Equity participation is a less important driver of returns.

Senior Debt

Senior debt is money owed by a company that has first claims on the company’s cash flows as it is usually collateralized by assets. If a company goes bankrupt, the issuers of senior debt (often bondholders or banks) are most likely to be repaid.

Mezzanine

Mezzanine debt bridges the gap between debt and equity financing and is one of the highest-risk forms of debt, which means it offers high returns (Between 12% to 20% per year). It is senior to pure equity but subordinate to pure debt. Mezzanine debt structures are most common in leveraged buyouts.

Return Maximising Strategies

Return-maximizing credit strategies seek to generate more private equity-like returns through purchasing either performing or distressed credit instruments. Business owners seeking liquidity to grow may wish to retain control of their companies. Return-maximizing strategies provide the desired liquidity without acquiring control of the business through instruments crafted to protect the lender. They can be further classified as:

Capital Appreciation

The Capital Appreciation strategy seeks long-term growth of capital by investing in
common stocks of companies across the capitalization spectrum. They tend to be either par debt or equity-like instruments that frequently function as a replacement for private equity.

Distressed credit

Distressed corporate credit managers typically target middle- to large-capitalization companies and purchase deeply discounted debt securities, either in the market or bilaterally. Most managers endeavour to generate returns through negotiation, using whatever leverage is afforded them as creditors under the governing document.

Opportunistic and Niche Strategies

Beyond the strategies that can be more easily classified as either generating returns or protecting capital lies a wide array of other credit strategies that would need to be evaluated individually to determine whether they are more oriented toward return maximization, capital preservation, or a mix of both. Very broadly, they can further be classified as:

Credit Opportunities

This strategy seeks to deploy debt capital opportunistically wherever market liquidity is lowest, or value is greatest. It can include rescue financings (which help borrowers stave off a liquidity crisis, upcoming maturity, etc.), specialty lending, regular-way credit in hung syndications, and distressed credit. Credit opportunities funds differ from distressed funds in their ability to source, structure, manage, and exit par instruments across a broad array of industries and markets

Specialty Finance

Specialty finance managers pursue a very broad array of niche strategies. These managers tend to target one small industry, requiring highly specialized expertise. Pharmaceutical and music royalties, rediscount lenders, and funds specializing in life settlements, catastrophe bonds, and trade finance have come to the specialty finance market recently. The highly specialized nature of these strategies makes them among the most difficult to perform due diligence on because each strategy requires unique lines of inquiry.

Who Can Invest in Private Markets?

Over 70% of the investor capital for private credit comes from institutional investors. Access to private markets traditionally cost millions of dollars, making them inaccessible to all but institutional investors and the extremely wealthy. ADDX, however, democratizes private equity investing by making it available to investors for as little as S$10,000 to invest in primary offerings and as little as S$100 to trade.

To qualify as an ADDX investor, investors need to meet one or more of the following conditions:

  • Yearly income of at least S$300,000 or
  • Net financial assets of at least S$1,000,000 or
  • Net total assets of at least S$2,000,000

ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.