Private debt can help some investors fight inflation

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Investors should view private debt as a hedge against inflation, analysts say.

Indeed, there is no private debt market and this means that it is not volatile like other assets.

Sophie Batoua, Chief Investment Officer of Fintex Capital, said Money Marketing that investors might want to consider private debt in the current environment.

She said: “There is no volatility because there is no market. The price does not vary.

“The only scenario where the value of private debt changes is if the risk of borrower default increases. As long as things are going well, the price remains stable.

Batoua, however, pointed out that this asset class, although less sensitive, is not completely impervious to inflation.

According to Preqin Global Private Debt Report 2022t, private debt experienced an average annual growth of 13.5%.

Data provider Preqin has projected private debt to accelerate to compound annual growth of 17.4% between 2022 and 2026.

Batoua said: “After the subprime mortgage crisis in 2008, banks reviewed their lending policies and exited certain sectors of the market.

“Someone had to replace the banks and that substitute was private debt.

“The rise of fintech and alternative credit has also played a role. Since it costs them more to finance themselves than the banks, they lend money at a higher price.

“Private debt has been particularly suited to this economic model.”

Preqin estimates that private debt assets under management at the end of 2021 were close to $1.21 trillion (£970 billion).

Still, AJ Bell, head of investment analysis, Laith Khalaf, pointed out that this asset class is more suitable for institutional investors.

He said: “Private debt is a very niche asset class that is best suited to institutional investors who already have well-diversified portfolios.”

Batoua added wealthy people as another category of potential clients.

She said: “It’s a less liquid asset. It’s hard to resell because there’s no market per se that deals in private debt.

“There is a population of customers for private debt, so it is possible to find a buyer, but it is not as simple as for public debt.

She pointed out, however, that there is a premium to this illiquidity.

Batoua added: “If you accept a disadvantage, you want compensation for it.

“Private debt gives you access to returns that are significantly higher than what you would find in the public debt market.”

Khalaf views private debt as an unattractive asset for retail investors due to relative illiquidity and lack of disclosure.

“There are low levels of liquidity and disclosure, which makes it unattractive for the vast majority of retail investors, especially in a world where interest rates are rising and the hunt for yield is getting a little easier. “, did he declare.

Due to the confidentiality of private debt, Batoua stressed the importance of finding a provider that offers transparency with its investments.

She added that this confidentiality can also be an advantage because it creates a direct relationship between the borrower and the lender.

Batoua said: “The advantage is that there is a direct relationship with the borrower. With public debt, the borrower decides to issue a debt in the market, and anyone can buy it.

“With private debt, there is a direct relationship between the borrower and the lender. This personal relationship allows the lender to have a better knowledge of the borrower.

“It also gives the lender the ability to negotiate the exact terms with the borrower. It’s not a finished product, the lender decides what they offer. Private debts are rather tailor-made products.

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