In today’s diverse investment landscape, private credit stands out as a compelling avenue for accredited investors seeking higher return potential, portfolio diversification, and the possibility of interest income. Also known as private credit, this alternative investment involves lending to private companies outside of the traditional public markets. 

Let’s explore not only the theoretical benefits of private credit but also its practical application through a real-world case study involving a modest investment in a fund that is using the capital to develop 100 locations of a growing coffee shop franchise in the Southeast United States.

Understanding Private Credit

Private credit is essentially the notion that investors become the bank. They lend cash to other investors or groups to help them complete their projects. Lending can take the shape in various ways, but at the end of the day, private credit offers investors an alternative way to aim for attractive returns.

This investment type generally offers several advantages over traditional investment options which helps to attract a broad range of institutional and individual accredited investors. These benefits include the potential for returns that are historically less correlated to the broad equity markets, portfolio diversification and targeted monthly or quarterly interest income.

Potential for Higher Returns

Private credit instruments often have the potential to yield more than traditional fixed-income assets like government or corporate bonds. This is because private credit investments typically involve a higher level of default risk, associated with lending to companies that may not have access to public capital markets. The potential for higher returns compensates investors for the illiquidity, making private credit particularly attractive for those who can manage and understand how the investment works.

This is why Blackstone is so bullish on this asset type as an investment for the economic environment that we’re in.

Portfolio Diversification

Investing in private credit can significantly diversify an investor’s portfolio. Private credit often exhibits low correlation with other asset classes like public equities and bonds, which has the potential to help stabilize overall portfolio performance, especially during periods of market volatility.

Possibility for Regular Interest Income

Private credit investments generally offer the possibility for regular interest payments, providing a targeted steady income stream. This feature is valuable to investors who rely on their investment portfolios for periodic cash flow, such as retirees or entities that manage pension funds.

Case Study: A Strategic Investment in 7 Brew Coffee Shops

To illustrate the practical benefits of private debt, let’s consider the case of our accredited investor client who allocated $100,000 to a private debt fund. This fund was specifically raising capital to expand a coffee shop franchise named 7 Brew, planning to open 100 new locations throughout the Southeast U.S. Though a majority of the capital is going towards the coffee shop developments, cash is being deployed into convenience store and gas station projects as well.

Investment Structure

The investment was structured as a three-year note, offering not only regular monthly interest payments but also provided a principal guarantee from both the multi-billion dollar corporation and personally by the CEO (subject to the claims paying ability of the guarantors). This dual-layer of alignment with the sponsor highlights their conviction and dedication to the investors’ principal, making the investment particularly attractive. Unless the company files for bankruptcy, after the 3 year period, investors seek to receive a full return of capital.

Intended Outcomes and Strategic Expansion

The capital raised was earmarked to support the strategic expansion of 7 Brew, a franchise known for its efficient service and strategic site selection. This expansion was targeted at a region experiencing economic growth and showing a market gap in quick-service, drive through coffee options. The intended increase in revenue from these new locations aimed to provide a robust return on the sponsor’s investment as the developer of the buildings.

Potential Benefits to the Investor

The investor was most interested in the potential for monthly interest. Secondly, the investment also enhanced portfolio diversification and offered a possible alternative income stream to their other investments, thereby shooting for stability in the client’s overall portfolio.

Conclusion: Leveraging Private Debt for Total Return Potential

The case of the 7 Brew coffee shop expansion exemplifies how private credit can serve as a powerful tool in reaching for higher targeted returns while managing risk through structured deals and corporate guarantees (again, subject to the claims paying ability of the guarantors). For accredited investors, private credit presents an opportunity to tap into alternative markets with potentially higher yields and beneficial diversification characteristics.

This blend of theoretical benefits and practical application highlights why private credit is becoming a crucial component of many investment strategies. As the financial landscape continues to evolve, the role of private credit and other alternative investments will likely become more prominent, providing both challenges and opportunities for savvy investors ready to explore these dynamic markets. 

Investors considering private debt should focus on opportunities that offer secured lending options, clear risk management strategies, and align with their broader financial goals. This strategic approach can unlock significant potential in alternative investment markets, as demonstrated by this case study.

All in all, we were able to successfully help our client gain access to an investment that is offering her attractive return potential which has a corporate and personal principal guarantee by the sponsor and its CEO (subject to the claims paying ability of the guarantors). Knowing she has the potential to be less concerned with what is happening in the broad stock and equity markets gives her the confidence needed to enjoy more time with her family. In fact, she’s expecting to finally be able to take that summer road trip with her daughter back east.