In the short term, the great financial crisis of the late 2000s delivered a profound, but thankfully not terminal, shock to the global economy. In the longer term it has been a catalyst for change and innovation, not least in the corporate finance market.
Witness research published in January by alternative asset analyst, Preqin. According to the company, the global private debt industry has tripled in size since 2007. In 2017, assets under management grew to a record $638bn.
And the growth seems set to continue. When Preqin spoke to investors, 42% said they intended to commit more to private debt in 2018 than they had in the previous year.
The Debt Vacuum
It would probably be wrong to attribute growth in the private debt market to the financial crisis alone, but it was undoubtedly a major contributing factor. For one thing, the collective heart attack suffered by banks around the world created a lending vacuum. Businesses and private individuals found that debt finance was no longer ‘easy’ to come by.
That vacuum wasn’t filled immediately, but within a few years new and innovative funding models emerged. That was particularly true here in the UK, where a relatively benign regulatory regime underpinned the rapid development of both equity crowdfunding and Peer2Peer lending.
But the growth of alternative finance was simply due to demand from businesses. Over the long-term, the financial crisis heralded a globally patchy but – in the case of Western industrialised countries – deep recession. This was in turn followed by a period of low growth, coupled with low bank interest rates which is only now beginning to turn around.
Against this backdrop, the growing private debt market has provided a means for investors – individuals and institutions – to secure superior returns. As such, private debt now plays a role in an increasing number of balanced portfolios.
A Complex Market
The private debt market is multifaceted. If we take private debt funds as an example, what an investor will find is a range of options, all with their own lending strategies and criteria. Equally important, there is wide variation in terms of where these funds sit on the risk and reward spectrum. There are of course common factors. Not least that any loans made on behalf of investors are conditional on comprehensive due diligence taking place. In other words, fund managers are committed to minimising risk, while securing superior returns.
Thus, the growth of the private debt industry has delivered real benefits to SMEs. In the wake of the financial crisis many struggled to secure the finance they needed to manage their cash and/or grow. Today there are more options available. Equally important, private debt funds are serving the requirements of investors. It has been a win/win.
A Private Debt Platform
From an investor perspective, one of the key questions surrounding private debt is likely to be: ‘how do I get exposure.’
And the truth is, there are many routes, ranging from managed funds to Peer2Peer lending platforms designed to attract retail investors seeking a better return than would be possible if they simply left their money in a savings account.
For High Net Worth individuals, The Route – City wealth club’s Private Debt Platform combines something of the simplicity and transparency of a P2P lending site with a product that is tailored with the needs of sophisticated investors.
The Route – Private Debt Platform provides loans to SME companies, drawing on pre-mandated funds committed by Members of The Route – City wealth club. By focusing on short term loans to SME businesses who are willing to absorb the cost of higher than average interest rates in order to address ‘special situations,’ the Route is able to target annual returns of 15% for Members. All loan offers are subject to comprehensive due diligence.
For Route Members, the Private Debt Platform provides a simple means to secure superior returns from a burgeoning market in private debt. And just as the industry as a whole has been growing, 2017 saw rising demand on the part of SMEs and an increase in Private Debt Platform deals from the previous year.
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