If you’ve heard the term private equity, you’re probably wondering if private credit is another word for the alternative investment product that pools funds from limited investors to acquire and restructure companies. However, while private credit does involve financing companies from private funds, it works very differently and has its unique advantages and risks to investors. In this article, we’ll explain all you need to know about private credit in Nigeria before considering adding this investment product to your portfolio.
What is Private Credit?
Private credit is an asset type that involves lending to businesses by non-bank institutions. Companies that cannot access the public credit market might choose to seek alternative financing sources from private credit loans, which unlike publicly offered company stocks and bonds, are not available to the general public. Companies that receive private credit loans are required to pay interest throughout the loan period and to return the principal to the lender at the end.
Major Differences between Private Equity and Private Credit in Nigeria
- Unlike private equity, a private credit investor does not own all or part of the company but can impose collateralization to secure the loan and request the borrower to fulfil certain obligations as agreed in the loan covenant.
- Another difference is that with private equity, profit is only made at the initial public offering of the company or when there is a secondary buyout to another Private equity fund. Private credit on the other hand is a fixed-income asset with agreed interest paid during the agreed loan period.
Should you invest in Private Credit in Nigeria?
Before investing in private credit, it is best to consider if this asset type fits your investment preferences. One reason private credit might be a great choice is if you seek a low-risk alternative investment as debt securities typically involve less risk than private equity investments. Private credit can also be a great choice if diversification is your goal since it offers a regular interest stream in form of interest. This asset type could also be suitable for you if you wish to invest in long-term security that has a higher yield.
Risks of Private Credit in Nigeria
- The major risk associated with private credit is its illiquidity. Since private credits are not often traded, they are usually held for long periods or even to maturity.
- Another risk lies in payment default on scheduled interest payments or the return of the initial principal, this is because many companies who resort to private credit have poor credit ratings when compared to investment-grade companies.
Want to Learn More about Private Credit & other Asset Types in Nigeria?
If you wish to learn more about private credit, private equity and other investment products in Nigeria, FBNQest offers strategic advisory services and financial insights to help various kinds of investors navigate Nigeria’s capital market and grow their income.
Request a callback today to speak with an investment advisor from our team. Visit: fbnquest.com/who-we-serve/become-a-client/.