Opportunities amid uncertainty: Private Credit

October 28, 20222 min read
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As recession fears grow, investors may be wondering which asset classes to include in their portfolio. Private credit investments can serve as a potential hedge against volatility. 

Key features that might make investing in private credit attractive at this time include a potential uptick in borrower quality, risk averse underwriting and the fact they can generate regular, monthly income. 

Volatile markets gives alternative lenders, like Yieldstreet, access to higher quality borrowers 

Ironically, market volatility can help alternative lenders access higher quality borrowers and originations. This is because commercial banks, typical lenders to high quality borrowers, tighten their policies for loans in times of market downturn — a phenomenon known as a “flight to quality” — driving potential, high quality customers to other alternatives. Yieldstreet can then take advantage of this new pool of borrowers and lay the foundations for a self perpetuating cycle of high quality borrowers and originators lending to equally, high quality customers.

Risk averse underwriting can minimize overall portfolio risk

To mitigate risk and to meet target returns, tight underwriting of deal transactions is crucial. While no one can underwrite anticipating an Armageddon, purchases and loans can be underwritten anticipating a credit default, which become more commonplace during a recession.

At Yieldstreet, secured transactions have underlying collateral to protect against significant losses in the event of default. At times when the transaction is unsecured, there are other mitigants for risk, such as advance rates on loans, discount rates on purchases, covenant triggers, buyback arrangements, subordinations and guarantees – with the logic being that the combination of these techniques offer adequate financial and credit support in the event of an economic downturn. 

Diversification of credits is also an important structure to consider when underwriting. When acquiring commercial and consumer receivables, Yieldstreet intends to ensure that no single state, industry, individual borrower is overrepresented. By avoiding these kinds of concentrations, we attempt to minimize the impact on our investments, especially in the event of a sector or a region specific downturn.

Investors can receive a monthly income, either from interest alone or amortization of loans 

Some investors might be uneasy with “locked in” investments that offer no regular payouts. Private credit investments typically generate regular, monthly income, minimum being the interest. That allows investors access to some liquidity — an important measure that some might be searching for in times of high volatility. 

Moreover, because private credit investments are usually based on floating rates, investors can anticipate rates that match the current environment. This means that there’s some protection from the Fed raising rates to control inflation. For investments that are not floating, Yieldstreet often builds in higher rates to accommodate the change.

At Yieldstreet, our private credit investments have continued to demonstrate the ability to generate returns that are in line with expectations, despite the broader turbulence in the public markets.