Since 2012, The Route – Finance’s Private Debt Platform has raised £132m in funds committed by investors. That’s an impressive figure in itself, but it is also part of a much bigger picture that has been developing in the wake of the 2008 crisis. Since then, private investors have been increasingly willing to fund small- and medium-sized businesses. Indeed, the allocation of capital to private investment has become a key aspect of the portfolio management strategies of many investors, including High Net Worth Individuals (HNWIs) and family offices.
This is clearly a good thing. Initially, the private credit market was filling a lending gap that resulted from banks repairing their balance sheets after the banking crisis. But the burgeoning of the private credit market has done more than fill a gap – it is also providing a new source of capital that is serving SMEs, mid-sized companies and entrepreneurs in circumstances that might not fit the lending criteria of traditional banks.
But that begs at least two questions. Why is the private credit market growing – after all investors have many options – and what does this mean for companies in search of capital?
The increased popularity of private credit has been driven by a number of factors. At one level, you can see the private credit – also known as private debt – market developing in response to lower bank lending. Companies needed new sources of debt capital, either for new projects or to refinance existing loans. As banks cut back, new solutions were developed – including Peer2Peer lending platforms (initially created to attract retail investors) and private debt funds.
But there were also forces at work on the supply side of the equation. Faced with volatility in the equity markets and a low yield environment in the bond markets, investors searched for alternative asset classes. As it developed, the private credit market offered a range of investors – institutions, family offices and HNWIs – a choice of options in terms of risk and reward. All private credit is not the same – for example, capital allocated to a fund that primarily invests in distressed or special situation lending opportunities, will typically offer higher returns than mainstream business lending, but within the context of a different risk profile.
Thus, one of the factors driving the private credit market has been an imperative on the part of investors to secure superior returns. This has led to it becoming a part of portfolio management strategy.
And the risks can be managed. One of the attractions of the private debt market is the role that due diligence plays in reducing risk. Before any loan is made, comprehensive due diligence is typically carried out. To take an example, special situations lending is (often rightly) considered to be high risk. However, the risk can effectively be managed down by due diligence practices and processes that are designed to filter out businesses or projects that are unlikely to prove viable.
Ease of Entry
There may also be an “ease of entry” factor in play.
As a recent article in Wealth Briefing pointed out, investors find the private credit market easier to access than private equity.
This, the authors say, is at least partly due to the fact that the private equity market is already flooded with cash.
There are some potential downsides for investors – mainly in terms of lower liquidity than bonds or shares. For that reason, an investment in private credit will tend to be just one component in a portfolio management strategy.
Aligning With Goals
These and other factors have contributed to a fourfold rise in private debt investment between 2006 and 2016 (when the total came in at $595 billion), and predictions of a $2.5 trillion total by 2026 by sector analyst Preqin.
The ability of private debt investment to deliver superior returns in a context of managed risk means that it is an asset class that aligns neatly with the objectives of family offices and HNWIs.
Accessing Capital From Private Debt Investors
Those big global figures may mean very little to an entrepreneur who is simply seeking to raise capital. The question he or she faces – more acutely – is given that private credit is now an established source of finance, how can it be accessed?
The Route – Finance’s Private Debt Platform provides one answer. Drawing on a community of HNWIs, family offices and institutions, The Route’s platform offers a genuine private debt solution, coupled with a relatively simple application process. In recent years, the platform has had particular success in lending to property development entrepreneurs, with the loans averaging around £1.5 million and repayment terms averaging ten months. All funds on the platform are pre-committed by investors and thus available to any company that meets The Route’s criteria and successfully completes the due diligence process.
It’s an illustration of what the rise in the private debt/credit market has meant for entrepreneurs. New money is available for a range of situations.
In 2018, investors committed almost £132 million to support small business entrepreneurs, developers and business owners via The Route – Finance’s Private Debt Platform.
Taken in isolation it’s an impressive figure. The Route – Finance platform’s investors are private individuals who are committing their own funds. Like all investors, they are accepting a degree of risk and the fact that The Route has secured a commitment totalling £132m indicates that Private Debt Platform represents an attractive option for High Net Worth individuals seeking a return on their capital.
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