Making private credit more accessible through technology
The private debt market has evolved as a popular alternative asset class over the last decade, growing at a yearly average of 13.5%1. Currently, there are approximately $4 trillion assets under management in private credit and real assets2. This growth indicates that investors are actively seeking to diversify their portfolios and access higher returns.
However, rising interest rates, high credit risk, illiquidity, and a lack of transparency render private credit a risky venture. In comparison, other asset classes, with their transparency, accessibility, and simplicity, appear safer. Thus, for private credit to grow as a tradeable asset, it’s essential to introduce innovations that simplify and expedite the trading of such instruments.
Tradeteq stands out as a notable innovation in this realm. Its unique infrastructure connects participants in the private credit market, automating workflows and paving the way for the market’s future growth. By converting private credit into tradeable financial instruments, it removes barriers and widens investor participation.
Barriers to Trade
Historically, trading private credit has been a challenge. Its illiquidity often results in elevated transaction costs. Structuring and executing deals frequently entail various fees, from brokerage to legal. The intricate nature of private credit mandates additional regulatory requirements and thorough due diligence, which, in turn, increase administrative and legal costs. This intricacy, coupled with the need for stringent negotiations and contract fulfilment, makes private credit less accessible, especially for market novices.
Couple these challenges with a lack of standardisation and centralisation, and it’s evident that despite its high yields, there’s a pressing need to guide investors through the private credit market and address its inherent hurdles.
Better, Faster, Stronger
Fintech’s rise in the aftermath of the Global Financial Crisis has a symbiotic relationship with private credit. Fintech innovations are poised to play a pivotal role in private credit’s evolution.
Digital platforms can enhance market accessibility by linking global buyers and sellers, thus lowering search costs. Such platforms expand investment horizons and help achieve superior returns. Secondary markets assist institutional investors, like pension funds, in evaluating investment options, ensuring they harness the high-yield potential in challenging scenarios while making informed portfolio choices.
Moreover, the proliferation of digital assets reduces minimum investments and fees. The incorporation of blockchain not only amplifies accessibility but also minimises risk. It offers transaction transparency, augments deal efficiency through smart contracts, eliminates intermediaries, and heightens security.
Security tokens, a type of digital asset, provide fractional ownership, thus simplifying portfolio diversification. They also foster secondary markets for private debt assets, enhancing liquidity. Their regulated nature also acts as a buffer against market volatility.
Opening the Market
With the supply of private credit waning against a backdrop of rising inflation and demand, digital transformation holds the key. By infusing liquidity through secondary markets and digital assets, it promises enhanced market efficiency, reduced risk, and greater accessibility for potential investors.
Platforms like Tradeteq offer centralised marketplaces for private credit market participation. They facilitate connections between buyers and sellers, streamline portfolio analysis, and automate legal documentation and asset selection, thus curtailing costs and complexity.
Given the burgeoning opportunities in the private credit landscape, and considering the unpredictable and dynamic nature of the global market, making private credit more accessible is of paramount importance. It will unlock further investment opportunities, catalysing global economic growth.
1https://www.titanbay.com/news-and-insights/what-is-fuelling-the-surge-in-private-debt
2https://www.mckinsey.com/~/media/mckinsey/industries/private%20equity%20and%20principal%20investors/our%20insights/mckinseys%20private%20markets%20annual%20review/2023/mckinsey-global-private-markets-review-2023.pdf
