Semi-liquid Private Credit Investments

Semi-liquid Private Credit Investments
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Semi-liquid private credit

Due to rising interest rates, inflationary pressures and geopolitical uncertainty, many high-net-worth individuals (HNWIs) and wholesaler investors are looking for new ways to add diversification to reduce downside risk and hedge against inflation. One approach to consider that offers attractive returns and more consistent yields is a ‘semiliquid,’ or multi-sector private credit strategy. A quality multi-sector strategy could reduce risk and hedge against inflationary pressures, as well as provide a consistent income stream and attractive return profile.

What is a semi-liquid private credit strategy?

In simple terms, a semiliquid strategy involves investing in a private credit fund that invests in a pool of private assets some of which are structured to give investors periodic, often monthly, distributions. Typically, a semiliquid private credit fund offers greater liquidity than a traditional closed-end private market funds, whilst also delivering higher returns than traditional mutual funds.

Semiliquid funds have also been shown to have less volatility and produce more stable distributions than publicly traded assets, during times of market stress. Due to their low correlation to public markets, HNWIs can potentially add portfolio diversification with a semiliquid private credit fund, reducing their overall portfolio risk without sacrificing on financial return.

Semi-liquid private credit funds are uniquely positioned in today’s rising interest rate environment

We believe that private credit and semiliquid private credit funds can provide high net worth Individuals with enhanced yields and returns even in today’s climate of rising interest rates. HNWIs would be wise to look to private credit funds over similar quality public market fixed income options due to the underlying characteristics of the assets the fund invests into.

Private credit assets are often floating rate instruments whose interest payments reset periodically as base interest rates increase. The short maturity of these assets allows the funds to regularly reinvest capital with terms that are aligned with current market conditions. By regularly adjusting the underlying pool of assets, investors can reduce the downside risk of sustained high inflation and interest rate increases, whilst still enjoying an attractive and consistent yield.

What characteristics should you look for when investing in a semi-liquid private credit fund?

Every fund manager will have their own suggested approach when it comes to the underlying private credit strategy their specific fund is built around. When comparing various funds, we suggest keeping in mind the following:

Look for multiple sources of yield and return

It is best to look for a fund manager who invests across the entire private credit market with a flexible, strategic approach. Flexible investing allows a manager to only invest in what they deem to be the best opportunities providing investors diversification and risk adjusted returns. For example, the investment team at Remara flexibly invests across a pool of diversified business, corporate and real estate loans in our Private Credit Fund. Loans to businesses and corporates include asset finance, business loans, trade and invoice finance and insurance premium finance.

Does the fund have a well-structured “liquidity bucket”?

One way fund managers achieve a level of liquidity is by investing a portion of the fund’s resources into more liquid securities. This is also referred to as a ‘liquidity sleeve.’

With a semi-liquid investment strategy, it is important that the in-built liquidity sleeve is reliable and derived from high quality assets. Investors should be asking whether the assets within the liquidity sleeve offer an attractive yield, without introducing any additional volatility and are robust enough to provide sufficient funds to investors when they need it most.

Our Private Credit Fund has an in-built and well-structured liquidity sleeve achieved through originating loans across multiple sources. A portion of all loans are short date noted that revolve on a quarterly basis providing regular cash exposure to our investors. This combined with the funds cash position and asset diversification provides a strong liquidity sleeve to investors in our Private Credit Fund.

Are the distribution yields sustainable?

When looking at various private credit funds available, there are large variances across the distribution yields. In some cases, lofty yields that are greater than or similar to total return targets can be a potential red flag. In this instance, once fees and charges are considered if there happened to be a default in one of the funds underlying assets it could result in a net asset value decline (NAV) for investors. HNWIs should look for more conservative distribution yields which can better withstand periods of market stress or look for a strategy that has an in-built security structure.

Within our Private Credit Fund, each underlying asset/loan is originated with a minimum 5% first loss by the loan originator, providing alignment of interest between the loan originators and fund investors. In simple terminology, by the originator partially funding each loan, the overall portfolio the fund invests in strengthens as it increases in size. It also means that each individual loan is covered by the remaining loans in the portfolio providing added security and assisting to mitigate downside risk.

^first loss means that the originating party will incur their loss ahead of fund investors, providing a capital buffer to investors for coverage of aggregate losses. 

To find out more about our Private Credit Fund and how it can benefit wholesale investors and high-net-worth investors looking for new ways to add portfolio diversification, contact our experienced team today.



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