Why Is Private Debt So Popular?

Private debt is the capital invested by investors in the private debts of companies. These debts give the investor a chance to invest in the ownership shares of the private company. They are not traded or issued in the public market which eliminates the chances of common investors entering the domain.

Private debt is a well-known alternative class available in the market. It is quite popular due to its low interest rates that attract many investors to add this alternate class to their investment portfolio. These interest rates have lowered government and corporate bond yields with lower borrowing costs which make them an obvious add in their portfolio.



Different categories of private debt
There are different types of private debts available in the private market, each coming with its own set of risk to return profiles. Investors can easily pump in their capital in these private debts through platforms that provide access to such debts such as Cgs Cimb. However, it is vital for investors to understand the different categories and understand where their investment would be a perfect fit.
  • Corporate lending
Corporate lending refers to the loan taken by the companies to deal with their short-term expenses. These loans are private and an investor needs to invest based on their trust in the company. Smaller to medium sized unlisted companies generally turn to this form of financing. However, unlisted companies do not receive any credit rating and have a less standardised information requirement than that of listed companies. Due to this, investors expect a higher premium and return for the risk they are undertaking.
  • Real assets
Real assets are loans to companies or consumers that require physical assets as collateral. Hence, these assets are very suitable for the integration of sustainability criteria that allows investors to make an impact on the real economy. The recent COVID 19 outbreak has made private debts more relevant to the investors’ portfolio.
  • Consumer loans
Consumer loans are loans provided to consumers for their personal purchases/expenses, such as purchasing a car or to settle their credit card debts. This category stands out within the private debt categories simply due to its wider spread, higher liquidity and higher expected return. Securities in this category are sold with an underlying ‘pool’ of loans with the same risk and maturity.



Benefits of private debt investing
 
  • Protects against inflation
A major concern for many investors and their portfolio is the increasing inflation in the society. Private debt protects the investors against such inflation by keeping pace with it and maintaining its purchasing power even while the prices of goods and services rise.

  • Rise of return rates with an increase in interest rates
The floating nature of private debts means that investors will not miss out on higher returns if the official interest rate rises. Investors can reap benefits with the increasing interest rates on these debts.

  • Deliver reliable returns
Market volatility is a serious concern for many investors dealing in the traditional market. However, private debts can deliver their investors with a stable income source through dividends even while the markets are volatile, Astrea Vi dividend is one such example.
 
  • Deliver attractive returns
Private debts provide investors with attractive risk-adjusted returns even in a low interest rate environment. This eliminates the concerns of the rising inflation prevailing in the financial markets and proves to be beneficial to the investors.

  • Low risk of capital loss
Private debts do not experience the same level of volatility as that of public markets. Lenders directly negotiate with the borrowers and have a greater influence on the terms of the debt. The investor hence has an idea of all the risks involved right from their initial investment till its maturity date.

As the number of investors investing in private debts are increasing, there are various platforms giving these investors a way to access these debts. ADDX is one such platform that investors rely on while choosing to invest in these debts.

ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.
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