A quiet revolution has been underway in global fixed-income markets over the past 15 years. A significant new asset class, known as private credit, has grown from a fringe product used mainly by medium-sized enterprises and lower-quality borrowers into a multitrillion-dollar market that is administered and controlled by today’s largest asset managers and private equity firms.
Despite growing more than tenfold since 2007 , private credit has only recently attracted the attention of the broader investor community and financial regulators. That scrutiny has not — as yet — resulted in these new lenders being caught in the same supervisory net as banks.
Origin Of Private Credit And Growth
Private credit arrangements are not new in themselves; private placements date back to at least the early 20th century, and private business loans have been issued since time immemorial. It was the Global Financial Crisis of 2007–2009 that helped accelerate the growth of private credit and the post-crisis regulatory changes that followed.
Generally, under those bank supervision rules, the higher the risk weight applied to an asset, the more capital an institution is required to hold against it. These regulations have had a consequent chilling effect on public debt markets, such as syndicated loans. Banks have also become much more discriminating about the clients to which they will lend.
“The big bang came after the Global Financial Crisis, which put the banks on a risk-weighted asset diet and allowed private credit to really take off,” says Louay Mikdashi, head of multi-sector private credit at Neuberger Berman. Recently, the universe of counterparties that are turning to private credit for financing has grown beyond small and credit-impaired borrowers, and the funds themselves have grown much larger.
Young Soo Jang, a researcher specializing in private credit at the Booth School at the University of Chicago, says that one of his studies found 78% of private credit deals are backed by private equity (PE) in the U.S., in part, because regulations like the Federal Reserve’s Leveraged Lending Guidance discourage banks from lending to firms with debt to earnings above a set threshold.
As the amount of private lending has soared, so too has the number of private credit funds actively raising capital. In the third quarter of 2023, there were approximately 1,080 private debt funds in the market globally, up from around 100 in 2011, according to market data provider
The firm forecasts that private credit assets under management (AUM) globally will reach $2.8 trillion by the end of 2028. Fund manager BlackRock is even more bullish, suggesting private credit AUM will reach $3.5 trillion by the same year. On the servicing side of the industry, growth in private credit has been equally evident.
What is private Credit
What is Private Credit?
Private credit is an asset type that involves lending to businesses by non-bank institutions. Companies that cannot access the public credit market might choose to seek alternative financing sources from private credit loans, which unlike publicly offered company stocks and bonds, are not available to the general public. Companies that receive private credit loans are required to pay interest throughout the loan period and to return the principal to the lender at the end.
Major Differences between Private Equity and Private Credit in Nigeria
Unlike private equity, a private credit investor does not own all or part of the company but can impose collateralization to secure the loan and request the borrower to fulfil certain obligations as agreed in the loan covenant.
Another difference is that with private equity, profit is only made at the initial public offering of the company or when there is a secondary buyout to another Private equity fund. Private credit on the other hand is a fixed-income asset with agreed interest paid during the agreed loan period.
Crimson Oak Private Credit
At Crimson Oak, we specialize in providing bespoke, tailor-made private credit facilities designed specifically for small and medium enterprises (SMEs) seeking to expand and grow their businesses. We understand the unique challenges SMEs face when accessing funds from traditional banks, often encountering rigid criteria and lengthy approval processes.
Our approach is flexible and customer-friendly, allowing us to come up with financial solutions that meet the specific needs of each business. By leveraging our industry knowledge and expertise,
Our private credit facility at favourable and flexible interest rate will help businesses to reach their maximum growth potential.
References
https://fbnquest.com/private-credit-in-nigeria-what-it-is-how-it-works-should-you-invest/
