Investors seeking steady cash flow, portfolio diversification, and risk mitigation may consider income-generating investments. These investments provide regular payouts—either in the form of interest, dividends, or other distributions—making them attractive in periods of market volatility.
Three income-generating investments that we have seen in demand at ADDX during this period of market uncertainty are private credit, structured products, and commercial paper. Let’s explore these types of investments and what role they can play in an investor’s portfolio.
1. Private Credit: Potentially enhanced yield
Private credit refers to debt financing provided by non-bank entities. Unlike publicly traded bonds or loans, private credit deals typically involve private transactions that offer higher yields in exchange for taking on higher risk or dealing with less liquidity. Types of private credit include direct lending, mezzanine debt, distressed debt and more.
Why private credit appeals to investors:
• Potentially higher yields: Private credit offers the potential for higher returns given factors such as an illiqudity premium.
• Diversification: Private credit loans typically have low correlation with the public markets, helping investors reduce their exposure to public market volatility.
• Customised structures: Lenders can negotiate the terms of private credit deals which allow for enhanced risk mitigation through covenants or asset-backed securities.
Who is this suitable for?
Private credit may be a choice for sophisticated investors seeking higher returns and willing to accept some illiquidity in exchange for enhanced yields.
2. Structured products: Tailored risk and reward
Structured products are financial instruments that combine different assets, typically bonds and derivatives, to create a tailored investment solution that aligns with specific investor needs. Structured products have customised payout structures that depend on the performance of the underlying asset(s).
Why structured products appeal to investors:
• Customisation: Structured products allow investors to tailor investments to their risk and return preferences. For instance, they can provide exposure to different asset classes like equities, commodities, interest rates, etc.
• Potential for enhanced yields: Some structured products are designed to provide regular coupon payments, giving investors the potential for higher yields.
Who is this suitable for?
Structured products are appealing among sophisticated investors who want a degree of customisation in their portfolios that are comfortable with the unique risks and features associated with these investments.
3. Commercial Paper: Short-term liquidity and stability
Commercial paper is a type of unsecured debt issued by corporations to meet immediate financing needs. These instruments are short-term in tenor and typically allow for companies to raise capital without the need for long-term debt issuance.
Why commercial paper appeals to investors:
• Low risk (for high quality issuers): Commercial paper issued by established, reputable companies that are financially stable are typically viewed as low risk as they have lower risk of default.
• Liquidity: The short-term nature of commercial paper allows investors to maintain liquidity in their portfolios while still earning returns, making it ideal for cash management strategies.
• Yield enhancement: Commercial paper typically offers enhanced returns since it is generally issued as an unsecured debt security.
Who is this suitable for?
Commercial paper is favoured by investors with a lower risk tolerance looking for short-term income opportunities that offer both security and liquidity.
Income-generating investments such as private credit, structured products, and commercial paper offer different ways to earn regular cash flows while managing risk. Private credit appeals to those seeking higher returns and are willing to trade off liquidity for yield. Structured products provide customised risk-return profiles with opportunities for capital protection and enhanced income. Finally, commercial paper offers a short-term income option for those looking for liquidity and lower risk.
By carefully considering risk tolerance, time horizon, and liquidity needs, investors can incorporate these asset classes into their portfolios to achieve consistent income generation and long-term financial growth.
Key risks
Credit risk: Private credit borrowers, structured product issuers and commercial paper issuers may default on their obligations. There is a possibility for an investor to lose the entire invested capital.
Liquidity risk: Private credit, structured product and commercial paper investments may have no or limited liquidity with valuations that may be based on estimates which cannot be marked to market until sale. There is no guarantee of selling these investments at fair value.
Interest rate risk: Private credit investments are sensitive to changes in interest rates. Increase in interest rates will typically affect the price of debt instruments negatively.
Capital risk: As return of a structured product depends on the performance of the underlying assets, adverse price movements may cause a loss of capital.
To learn more about how you can access private markets and alternative investments, open an account with us and explore the diverse opportunities we offer to enhance your portfolio.
This article is for general informational purposes only and has not been independently verified to ensure its accuracy and fairness. This article does not constitute any advice or recommendation from ADDX or any of its affiliates. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs. No representation, warranty or other assurances of any kind, expressed or implied, is made with respect to the accuracy, completeness, adequacy, reliability validity or availability of any information in this article. Under no circumstance shall ADDX have any liability to the reader for any loss or damage of any kind incurred as a result of the use or reliance on any information provided in this article. This article may not be modified, reproduced, copied, distributed, in whole or in part and no commercial use or benefit may be derived from this article without the prior written permission of ADDX. ADDX reserve all rights to this article.
