What is private credit and why is it booming?

This post was created in partnership with Kilde Pte Ltd (“Kilde”). All views and opinions expressed in this article are Beansprout's objective and professional opinions. 

What happened?

We recently came across an article that shared that investors have continued to put their money into US private credit.

According to data provider Pitchbook, commitments reached US$94.9 billion in the first half of 2023.

Clearly, investments in private markets have become more mainstream. 

The private credit market grew rapidly after the 2008 Global Financial Crisis as banks were forced to cut lending due to increased regulations. 

At the same time, pension funds and institutional investors sought investments with higher yields as interest rates fell to historic lows. 

Private credit managers were able to cater to this demand by directly originating loans with attractive returns effectively taking over deals from the banks.

According to Preqin, the assets under management (AUM) for private credit reached $1.5 trillion in 2022.

In its latest forecast, Preqin further expects the sector’s AUM to grow at 11% from 2022 to 2028 to reach an all-time high of US$2.8 trillion. 

With the increasing popularity of private credit, we decided to dive deeper to learn more about the asset class. 

What is private credit?

Private credit is a kind of debt financing made by lenders other than banks to companies, both large and small. It is particularly popular with small to mid-sized companies which may not be able to access public markets for debt financing.

These credit solutions are structured to meet the borrowers' requirements in terms of the size of financing, timing, and conditions of the loans. 

There are many forms of private credit, but the most popular ones are:

• Direct lending: Providing credit to the balance sheet of the borrower. The credit can be secured by the borrower’s assets and shareholders' guarantees, substantially lowering the risk for the lender. Senior unsecured, mezzanine loans and junior loans are inherently more risky but also provide a higher yield to the lender.   
• Asset-backed lending: Providing credit to finance specific assets where the payout to the lenders fully depends on cash generated by the asset. A popular example is receivables from invoices purchased by lenders.
• Distressed debt: A specialised debt where credit is provided to financially challenged companies at a discount. This is highly dependent on the successful turnaround of the distressed company, but also presents the highest risk and returns potential.

The most common one is senior secured lending - which sits at the top of a company's capital structure, where lenders tend to be paid back first before other debt holders.

At the same time, covenants are introduced as part of the agreement to protect lenders. For example, certain limits can be introduced on the borrower, such as the amount of leverage the borrower can take on to detect early signs of distress.

How is private credit different from public credit?

Private credit differs from traditional public credit in a few ways. 

For example, private loans are negotiated between the borrower and the lender, allowing more flexibility to fit the loan to the lender’s and borrower’s requirements.

Private loans also don’t require credit rating agencies like S&P or Moody’s to provide an assessment; instead, the lender performs its own due diligence on the borrower’s finances before making a loan.

Lastly, investors can sell public bonds at any time, but most private loans need to be held by the lenders up to their maturity. 

What are the benefits of private credit?

#1 – Potential for higher returns 

Private credit investments are typically made at a higher interest rate compared to bank loans or public credit. The higher interest rate reflects more limited access to the debt capital by the borrowers as well as the premium for private credit’s illiquidity.

This means that investors in private credit would be able to potentially earn a higher return on their investments if the borrower makes payments on time.

For example, private credit funds generated returns of 4.2% in the first nine months of 2022. However, US high-yield bonds lost 14.7% in the same period, and the Bloomberg Global Aggregate index also fell 14.3%.

#2 – Low correlation with public markets

The relative illiquidity of private loans creates another useful feature: low correlation to the movements of the public markets. Public bonds are traded all the time, and their price fluctuates based on supply and demand. Private loans are meant to be held up to maturity at accounted as per their nominal (face) value. 

This provides welcomed diversification benefits to investors of private credit. 

What are the risks of private credit?

Despite the potential benefits of private credit, there are risks that investors should be aware of. Some of the key risks include potential default by borrowers and lack of liquidity. 

#1 – Potential default of the borrower

Any lending, albeit through private credit or public bonds, assumes a risk of default (non-payment of interest and principal). 

Public bonds are highly regulated with mandatory bond credit ratings and regular financial disclosures. 

In private credit, is up to the private credit manager to make sure that investors' rights are sufficiently protected.

As of the third quarter of 2023, default rates remain low at 1.41%, according to Proskauer’s Private Credit Default Index.

However, this may rise should interest rates remain higher for longer. 

#2 – Illiquid compared to public debt securities

Private credit is part of private markets and not publicly traded; hence, it is relatively illiquid. 

While private credit investments can be redeemed at maturity or during designated redemption time windows, the redemption windows are available once a quarter at best. 

This means it may be difficult for investors to exit the investment into cash should there be an immediate need.

How accredited investors can gain exposure to private credit

Investors can gain exposure to private credit through private credit funds or emerging players in the fintech space, such as Kilde.

Kilde is a licensed asset-backed lending platform which aims to make it easy for institutions and accredited individuals to invest in private debt. 

The company provides an opportunity for investors to purchase short to medium-term privately placed bonds secured by a cash-generating asset. Investors, in turn, receive fixed returns from the issuers. 

#1 - High historical net returns

According to Kilde, it has delivered a yield of more than 10% per annum to investors since its inception in 2021. 

In 2022, Kilde generated a weighted average return of 11.64% across deals that were active on its platform. 

As of October 2023, S$31 million has been invested on the platform. 

Kilde generates this yield by providing wholesale loan facilities to borrowers with cash-generating assets like consumer and SME loan portfolios. 

These loan facilities are typically for a duration of 12 to 36 months. 

According to Kilde’s website, these borrowers include Unafinancial, StikCredit, LF Tech Group, lutecredit, Fundbox, Everest Capital and Transport and Development Bank JSC.

If you have not heard of these names, Everest Capital operates Poland's second-largest consumer lending platform. Transport and Development Bank JSC is Mongolia's oldest and largest private bank. LF Tech is the fastest-growing short-term loans and car loans provider in Kazakhstan. Iutecredit is the largest consumer lending firm in South-eastern Europe.

#2 – Licensed by the MAS

Kilde is incorporated in Singapore with a Capital Markets Services licence issued by the Monetary Authority of Singapore.

According to the company, it goes through a rigorous data-driven investment process involving a health check of the business, credit risk evaluation, collateral value analysis, investment structuring, covenants, and collateral monitoring. 

To be eligible to be a borrower on the platform, the company must have cash-generating assets with a net value of above $10 million, a rapidly growing, qualified management team, and solid risk management practices. 

Kilde has more than 100,000 individual loans as collateral, with more than 160% cash coverage of the investment. 

As part of the company’s collateral monitoring process, it uses more than 20 million data points on loans and repayments and has a 6 months collateral cash flow rolling forecast.

Kilde’s CEO is Radek Jezbera, who has 17 years of experience in payments, credit risk, and consumer lending. Radek was formerly a Consulting Director at PwC and later a partner in a boutique credit risk consultancy.

In the event that Kilde decides to terminate its operations, the platform will operate until all active issuances are liquidated in the system. This means that borrowers must keep following the payment schedule so that investors can be paid according to the terms of their ongoing positions. 

#3 - Ease of onboarding and use

Kilde aims to make investing in private credit simple and without hidden fees.

Accredited Investors can be register in 3 minutes with SingPass.

A fee of 0.5% per annum will be charged for those who invest S$100,000 and above, and a fee of 1.0% per annum will be charged for investments below S$100,000. 

If you are an accredited investor and keen to get access to the Kilde platform, you can find out more here. 

Important disclaimers

Kilde is intended for accredited investors only.   

The information herein is for general information only and does not constitute a recommendation, an offer to sell, or a solicitation to invest in any securities, options, or other derivatives in any jurisdiction and its content is not prescribed by securities laws. This information herein is not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject Kilde to any registration or licensing requirement in such jurisdiction or country.

Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

You should carefully consider whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources, investment eligibility and relevant circumstances. 

The information and analysis shared here is from Beansprout and not Kilde. Kilde does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Kilde accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. 

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