Private credit, infrastructure and real estate

Private Equity is the most established segment of the Private Markets investment universe. However, large institutions and other sophisticated investors are increasingly seeking out alternatives, including Private Credit, Infrastructure and Real Assets.

Private Credit refers to bilateral, privately agreed loans between a borrowing entity and non-bank lender (e.g. a Private Credit fund). As with a regular loan arrangement, the lender usually receives a stream of interest payments, plus repayment of principal at maturity - not guaranteed.

This can be an attractive option for smaller, less established companies when banks tighten lending requirements. It may be a faster and more efficient way of raising capital, compared with tapping traditional debt markets.

For their part, Private Credit funds and their investors are compensated for plugging a gap in the market via higher potential yields. The issuing fund can also tailor loans to fit its own risk appetite and protect investors in the event of a default.

As with Private Equity, Private Credit has outperformed public equivalents in recent decades, although past performance is not a guide to the future. Private Credit also offers investors a potentially useful way to diversify an existing fixed-income portfolio.

Real estate funds invest in properties across a range of sectors – residential, industrial, commercial, retail and hospitality. Funds often specialise by sector and follow a variety of strategies with respect to geography, time horizon, use of leverage and so on.

With over 90% of property currently privately owned, the market for Private Real Estate is vastly bigger than its public equivalent. Despite this, it remains underweight in most private investor portfolios – although this is slowly changing.

Real estate investments generate income via rental payments. They may also benefit from changes in the value of the underlying property, though neither income nor growth are guaranteed.

As a tangible, bricks-and-mortar asset, real estate has a low correlation with mainstream stock indices. This could potentially make it a useful portfolio diversifier.

Real estate is also widely acknowledged to be a good inflation hedge. This is because the value of properties tends to go up in tandem with the prices of goods and services.

There are risks though. Real estate is a highly leverage-driven and cyclical market, and prices are sensitive to changes in the economy. Liquidity is also lower than in mainstream financial securities, and is prone to drying up during periods of market stress.

Infrastructure is the investment in assets involved in moving natural resources, people or data from where they are created to where they are needed.

So, infrastructure funds invest in projects that seek to build, upgrade and operate a nation’s physical assets. This may include transport networks like railways, roads and bridges, as well as energy installations – both renewable and traditional.

In many Western economies, private investment is badly needed to improve and repair essential infrastructure. Accordingly, Private Infrastructure funds may offer an attractive and stable source of long-term income (not guaranteed).

Like real estate, infrastructure assets are largely uncorrelated to mainstream stock indices. They could potentially also offer an inflation hedge, since cash flows are often explicitly inflation-linked.

Before investing in an infrastructure fund it is important to understand the revenue model and type of assets involved. Note that infrastructure investments are susceptible to regulatory changes – particularly those related to climate and sustainability.