13 Mar White Paper – Introduction to Private Credit
Introduction to Private Credit
Large institutional investors allocate a significant amount of their total assets to fixed income, which is intended to provide consistent income and lower volatility than equity. Insurance companies, pension funds and certain other long-term investors seek specific fixed income assets that provide both long duration and potentially lower losses than other investment choices. Many of these investors now realise that the fixed income asset class that can provide the duration they need along with potentially higher returns and lower losses is private credit, also know as “private placements”.
The purpose of this paper is to introduce the asset class and explain its nature, characteristics and distinctions and explore some of the advantages and risks of investing in private credit.
Private placements are essentially long-term loans to corporations, 90% of which are investment grade. Borrowers utilise the private placement market for a variety of reasons: to maintain the confidentiality of their financials, to obtain more flexible terms than offered by the public market or to borrow money when their credit histories are more complex in nature. The borrowers use the proceeds to finance acquisitions, refinance existing debt, support business expansions and other general business purposes.
The debt offerings are “private” because the notes are sold only to qualified institutional buyers (QIBs) and as such do not have to be registered with the U.S. Securities and Exchange Commission (SEC). Functionally, a private placement is a hybrid between a public bond and a traditional bank loan.