Private Credit has become more of a fixture in the global economy since 2008. Gareth Henry points to one direct loan from Warren Buffet to help stop the bleeding at Goldman Sachs. Buffett demanded special terms with Goldman and successfully kept they from imploding. For this, Buffett earned a 74% return of $3.7billion. This much publicized loan caught the attention of both institutional and personal investors.
Since 2008, private credit has been most attractive when public markets struggle. Tougher regulations have forced traditional bank lenders to cut back on lending which has allowed direct lenders to move in. Case by case negotiated interest rates are often more favorable than consumer credit offers. See more at bizjournals.com for more business news.
Gareth Henry explains how debt advisers pitch managers with investment opportunities. Direct lenders do their own research and it’s common for lenders to hold onto these loans longer term.
Average consumers are quite familiar with direct lending as US households carry over $1 trillion in installment debt coming mostly from MasterCard and Visa. The average American holds more than $6,300 in credit card debt with interest rates of 18% to 28%.
Direct lenders compete by using algorithms that score credit more accurately and better measure credit default risk. The lower rates and monthly payments for the borrower are pushing private credit forward.
With so many various underlying strategies, structure, terms and liquidity, the expectations of risk and return vary greatly across private credit approaches. Gareth Henry points out that Private Credit mostly involves illiquid assets so investors typically require an incremental yield. This illiquidity premium is not easy to accurately calculate and there is yet to be an agreed upon standard metric.
Overall returns of private credit are also difficult to measure. Some look at funds with the highest exposure to direct lending and follow the money. Gareth Henry has seen the industry perform consistently which has not only satisfied existing investors but has also drawn in waves of new institutional and personal ones.