Gareth Henry provided an in-depth overview of investing in private credit funds for the article “An Overview of Private Credit with Gareth Henry” that was published on the Daily Forex Report. The article, written by Clara Davis, reveals that the potential returns on investing in this alternative investment opportunity are often dependent on the economic cycle. Those who are investing in distressed credit will find significant opportunities to invest when the economy is going down. However, Gareth Henry suggests that those who are involved with senior debt funds or mezzanine loans will lose their returns when the economy is going downhill. This occurs because any company that defaults on their loan caused by the economic downturn will reduce the performance of the funding.
However, those who find opportunities during these times will see greater returns when the economy begins to recover because their holdings will begin to benefit. Most debt lenders are able to handle the downturn of the economy if they have collateral. Smart debt lenders will also make sure they have floating loan rates which will prevent them from suffering if loans rise. Gareth Henry also suggests that there are some risks involved with investing in private credit funds.
Though the level of risk involved depends on the kind of private credit you invest in, it is important to be aware of the potential risks inherently involved in this kind of investment. One risk to take into consideration is the management capacity. Many strategies involving private credit will be used to expand rapidly. However, there needs to be a plan to keep the expansion in check otherwise it can become inefficient. Investors need to be aware of the manager’s ability to scale the business, particularly if that business is going to expand rapidly. Another risk that needs to be considered by those looking to invest in private credit is the legal jurisdiction. Those who are involved with debt need to be aware of the legalities where the businesses operate. Many different territories and countries where the businesses operate have different laws regarding the rights of creditors. Investors need to be aware that some jurisdictions favor the rights of the debtors over the creditors.