A Brief Introduction to Private Credit

May 23, 20234 min read
A Brief Introduction to Private Credit
Share on facebookShare on TwitterShare on Linkedin

Key takeaways

  • “Private credit” identifies a large part of the credit market – beyond publicly traded fixed income instruments or bank lending – that has been traditionally inaccessible to everyday investors. 
  • Private credit can be an attractive means of financing when more traditional avenues are inaccessible due to specific circumstances. 
  • There are two ways to access the asset class on Yieldstreet – through single offerings, a curated list of individual private debt investment offerings, or through selected private credit funds sponsored by leading private credit fund managers. 

What is Private Credit?

“Private credit” identifies a large part of the lending market – beyond publicly traded fixed income instruments or bank lending – that has been traditionally inaccessible to everyday investors. Private credit investments are focused on privately-negotiated debt transactions between a borrower and a lender. 

A privately negotiated loan provides greater flexibility to tailor an investment to the business or asset being financed, by taking into account its risk profile and specific features. 

From a borrower’s perspective, private credit loans can help a borrower obtain funds if there are some complexities that prevent them from receiving lower-cost, traditional financing. Lenders of private credit opportunities seek higher returns by providing a customized solution to the borrower and for the in-depth analysis needed to understand the complexities and risks of the borrower. These returns are comparably higher than loans from traditional lenders, such as banks, that have strict lending guidelines that a large number of borrowers cannot meet.

For example, a company may be seeking capital to fulfill a large new customer order that it already has under contract. While traditional lenders may not be able to fit the opportunity within their lending criteria, a private lender can perform diligence on the customer, the customer’s ability to pay for the order, the gross profit of fulfilling the order, the potential for additional orders from the same customer, the strength of the contract, the use of the loan to fulfill the contract, and so on, in order to provide a customized loan to the borrower that helps achieve both the lender’s return goals and the borrowing company’s operating objectives. 

While private lending has been there for some time, private credit became relevant as an asset class in the years that followed the 2008 global financial crisis. Indeed, as a response to the excess risk taken by banks that triggered the crisis, sweeping regulations were implemented, which restricted the types of lending that could be done by commercial banks or take place in fixed income markets. The new boundaries and capital reserve requirements meant a large segment of lending was cut off from the traditional channels.

Because these regulations were rigid, many of these companies and borrowers could not access bank lending despite good credit history and valuable collateral. This has created a vast opportunity set private credit lenders that are not subject to the same regulatory requirements and are able to lend much more flexibly.

Invest in Alternative Assets

Diversify your portfolio with private market investment offerings.

What is the rationale for a private credit transaction

Private credit can be an attractive means of financing when more traditional avenues are inaccessible due to specific circumstances – such as the need for short-term maturities (banks tend to prefer longer-term lending), the nature of the business, the lack of acceptable collateral (banks only consider specific types of assets), the desire to structure a more complex transaction, or even just the urgency to obtain capital. 

Some examples of complex situations that may drive a borrower to seek private financing: 

Leveraged Buyouts – A company is bought using debt, and the borrower needs to have certainty that the loan will be obtained as a condition to complete the transaction, especially if the transaction is complex. 

Mergers & Acquisitions – A loan is needed for a business to acquire and integrate with another business, and traditional lenders may perceive the integration of the newly acquired business to be too complex and intensive – and thus risky. 

Growth Capital – The founder of a high-growth business wants to limit the dilution of their ownership interests in the business that would occur by taking venture capital money. 

The lender is primarily driven by: 

— Higher return potential, mostly related to the urgency and complexity of the transaction. 

— Greater reporting transparency, which is usually available in privately negotiated transactions, as a tool to monitor the performance and ongoing risks of the debt investment

— More control due to the presence of fewer lenders within the capital structure. 

Reporting transparency and stronger control can potentially help monitor risk more effectively over the life of the loan. If conditions deteriorate, there may be greater room to protect capital by requiring the borrower to accelerate the paydown of a loan, or to restrict certain activities until those conditions reverse to an acceptable level. 

Conclusion

Yieldstreet enables access to Private Credit investment opportunities which have traditionally been inaccessible to everyday investors. 

There are two ways to access the asset class on Yieldstreet – through single offerings, a curated list of individual private debt investment offerings with varying return profiles, or through private credit funds sponsored by leading private credit fund managers, which Yieldstreet carefully selects.

In addition to the offerings available at this point, Yieldstreet is looking into the space to identify further opportunities across diversifying strategies, including sports, media and entertainment, global dislocation and venture/growth. 

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure