Blog

The growth of Private Credit Market in recent years!In this article, I will talk about what Private Credit is, astronomical market growth, types of private credit, why firms opt for Private Credit lenders, why investors prefer to allocate part of their managed funds to private credit players, and potential risks of private credit.Private credit refers to loans or debt investments made by non-institutional lenders, principally, private companies (e.g. Capital/Investment firms) that provide capital through private markets. It differs from traditional lending in terms of yields (higher yields) and less restrictive terms offered to companies that lack access to debt from commercial banks. The private credit (PC) market has been growing exponentially in recent years, expected to reach $3 trillion market by 2028, according to Moody’s. &nbsp;It stood only at $1 trillion in 2020 (2x growth). One primary growth driver of this boom is that after the 2008 financial crisis, regulations on banks were tightened, limiting their ability to lend to certain sectors, particularly middle-market companies. As a result, businesses are turning to private credit markets to fill the lending gap. Furthermore, since interest rates remain relatively low in many parts of the world for an extended period, investors have sought higher yields than what is typically available in traditional bond markets. Private credit offers higher yields which attract institutional investors like pension funds, insurance companies, and family offices. Also, unlike traditional bank loans, private credit can provide companies with faster access to capital, making it an attractive alternative for businesses that need funding quickly.<figure id="figure-303fsq4bnqm7zifa1y" class=""><img id="303fsq4bnqm7zifa1y" src="https://cdn.durable.co/blocks/24AbNA1YItjMnf1FHFbkCcZGYr81oqaogEmdJtquNizpXWXyfZw2whoXCpDhT7HI.jpg" alt="" title="" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9; object-position: center center;" data-corners="default" data-aspect="16:9" data-caption="" data-positionx="undefined" data-positiony="undefined" data-fullwidth="false" data-mce-src="https://cdn.durable.co/blocks/24AbNA1YItjMnf1FHFbkCcZGYr81oqaogEmdJtquNizpXWXyfZw2whoXCpDhT7HI.jpg" data-mce-style="aspect-ratio: 16/9; object-position: center center;"></figure>Private credit market offers various types of lending:- Direct lending: where private-capital-credit providers lend directly to mostly middle-market firms- Distressed debt (also known as high-yield): when firms intend to rescue drowning companies by providing money, seeking very high returns to offset the risks being taken- Mezzanine debt: some middle-market companies seek to grow and/or make acquisitions, thus; Mezz debt offers a hybrid form of debt, which is between senior debt and equity. Some Mezz debt would have conversion features (convertible debt) &nbsp;- Structured finance: these complicated financial instruments are mostly backed by assets such as mortgage-backed securities, asset-backed securities, etcIn the chart below, it’s illustrated that most loan issuances were “direct lending”. This chart also displays the growth of the private credit market as mid-sized companies access capital through private credit providers as opposed to traditional banks like JPMorgan, Citi Bank, Bank of America, etc.<figure id="figure-iw72x3ulim7zihvq2" class=""><img id="iw72x3ulim7zihvq2" src="https://cdn.durable.co/blocks/2aWVdASKpxCKgq5KDHYOEIfIampPBQP8NawBD0zwm8iXt2HeIvMgPjDAq3BiCITu.jpg" alt="" title="" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9; object-position: 0% 50%;" data-corners="default" data-aspect="16:9" data-caption="" data-positionx="0%" data-positiony="50%" data-fullwidth="false" data-mce-src="https://cdn.durable.co/blocks/2aWVdASKpxCKgq5KDHYOEIfIampPBQP8NawBD0zwm8iXt2HeIvMgPjDAq3BiCITu.jpg" data-mce-style="aspect-ratio: 16/9; object-position: 0% 50%;"></figure>&nbsp;Companies turn to private credit for several key reasons. First, it offers flexibility with customized repayment schedules and covenants tailored to their needs. Additionally, private credit provides faster access to capital compared to traditional bank loans, which can be a significant advantage when time is of the essence. Many businesses also seek private credit as an alternative to bank financing, especially when banks are unwilling to lend due to regulatory pressures or a preference for avoiding more complex loan processes.Private credit carries several risks that, one of which is illiquidity. &nbsp;These investments often have longer holding-period, making it more difficult to sell them quickly if necessary. Credit risk is another concern, as if a borrower defaults, the lender may struggle to recover their investment, particularly with unsecured or subordinated loans. Broadly speaking, private credit markets also are influenced by economic cycles, during an economic downturn could increase the likelihood of borrowers struggling to repay their loans.

The Growth of Private Credit Market

<h2>What is Sustainable Investment?</h2>Sustainable investment is a method of investing in companies, projects, or funds that aim to generate positive social and environmental impacts alongside financial returns. This approach integrates environmental, social, and governance (ESG) factors into the investment decision-making process. As the awareness of climate change and social issues grows, more people are turning toward sustainable investment options to align their portfolios with their values.Incorporating ESG criteria into investments can help mitigate risks and uncover opportunities that traditional analysis might overlook. By considering aspects like a company’s carbon footprint, labor practices, and board diversity, investors can make informed decisions that contribute to a more sustainable future.<figure id="figure-eehmcrcqeim7s3fqhl"><img id="eehmcrcqeim7s3fqhl" src="https://media.gettyimages.com/id/2157585497/photo/sustainable-growth-graph.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=1zVRJvyJhS-R2fOj8KmMMBHDUa2CC2iRjH4OIIF72-I=" alt="sustainable investing" class="object-cover bg-gray-100" style="aspect-ratio: 16/9;" data-mce-src="https://media.gettyimages.com/id/2157585497/photo/sustainable-growth-graph.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=1zVRJvyJhS-R2fOj8KmMMBHDUa2CC2iRjH4OIIF72-I=" data-mce-style="aspect-ratio: 16/9;"></figure><h2>Types of Sustainable Investment Options</h2>Sustainable investors have several options to explore. These include:<ol><li>Socially Responsible Investing (SRI): This strategy involves actively choosing or avoiding investments based on ethical guidelines. SRI funds often screen out industries like tobacco, firearms, and fossil fuels.</li><li>Impact Investing: This approach aims to generate specific positive social or environmental impacts. Investors may focus on sectors like renewable energy, affordable housing, or education.</li><li>ESG Integration: This strategy involves incorporating ESG factors into the traditional investment process to enhance long-term outcomes and risk management.</li></ol>These strategies offer flexibility for investors to tailor their portfolios according to personal values and financial goals.<h2>Benefits of Sustainable Investment</h2>Investing sustainably offers numerous benefits beyond financial returns. One of the primary advantages is the potential for improved risk management. By considering ESG factors, investors can better anticipate regulatory changes, resource scarcity, and reputational risks.<figure id="figure-13bmszxvp5m7s3fqhl"><img id="13bmszxvp5m7s3fqhl" src="https://media.gettyimages.com/id/1185945324/photo/top-view-of-a-young-green-forest-in-spring-or-summer.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=XkioS8h_uum7pIAsGFvNT3mnG2hzN7N476JArOQa1Y0=" alt="environmental finance" class="object-cover bg-gray-100" style="aspect-ratio: 16/9;" data-mce-src="https://media.gettyimages.com/id/1185945324/photo/top-view-of-a-young-green-forest-in-spring-or-summer.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=XkioS8h_uum7pIAsGFvNT3mnG2hzN7N476JArOQa1Y0=" data-mce-style="aspect-ratio: 16/9;"></figure>Moreover, sustainable investments often support innovation and growth in emerging sectors like clean technology and sustainable agriculture. Such investments can drive economic development while addressing pressing global challenges.<h2>The Rise of Sustainable Investment</h2>The world is promoting sustainability, with a strong emphasis on environmental stewardship and social equity. This progressive mindset has translated into a growing interest in sustainable investment options among many people. Local initiatives and policies further encourage individuals and institutions to allocate capital toward sustainable projects.The world's commitment to renewable energy and green infrastructure has created a fertile ground for sustainable investment opportunities, attracting both individual and institutional investors seeking to make a positive impact.<figure id="figure-fsvhcdttwm7s3fqhl"><img id="fsvhcdttwm7s3fqhl" src="https://media.gettyimages.com/id/1816281690/photo/sustainable-energy.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=w6W6mMucGZMYz1LB6WFpmWhcp7vRtiljOsNVz2ghsdQ=" alt="renewable energy" class="object-cover bg-gray-100" style="aspect-ratio: 16/9;" data-mce-src="https://media.gettyimages.com/id/1816281690/photo/sustainable-energy.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=w6W6mMucGZMYz1LB6WFpmWhcp7vRtiljOsNVz2ghsdQ=" data-mce-style="aspect-ratio: 16/9;"></figure><h2>How to Get Started with Sustainable Investing</h2>For people interested in embarking on sustainable investing, the first step is to define personal values and impact goals. Next, research various funds or companies that align with those objectives. Consulting with a financial advisor who specializes in sustainable investment can also provide valuable insights and guidance.Online platforms and tools are available to help investors evaluate the ESG performance of potential investments. By leveraging these resources, individuals can make informed decisions that align with their values and desired impact.<h2>The Future of Sustainable Investment</h2>As awareness around sustainability continues to grow, the demand for sustainable investment options is expected to rise. Advancements in technology and data analytics will enhance the ability to measure impact and performance, making it easier for investors to track their contributions to societal and environmental goals.By choosing to invest sustainably, individuals can play a crucial role in shaping a more equitable and sustainable future for all.

Understanding Sustainable Investment Options

I have been noticing (while reading several articles) that a few financial analysts believe profitability should not be the essential sole predictor for stock returns. Obviously, most investors concentrate on financial information and earning prospects to both evaluate a firm’s intrinsic equity value and anticipate the cross section of average returns. Typically, most investors utilize profitability measures to come up with better predictions about the expected returns. Yes, it’s true that, in 2006, Fama and French found that corporations that are more profitable would generate higher returns. However, in 2013, Novy-Marx suggested that profitability is not the single method (tool) to use in order to measure cross section of average returns, book-to-market ratio can be utilized as well.Historically speaking, there have been some corporations that have gone bankrupt while having profitable income statements. For instance, Enron and WorldCom showed that profitable GAAP income statements can survive while having negative operating or free cash flows for years. Therefore, investors might make inaccurate and poor financial decisions when focusing solely on income statements. Instead, investors should analyze a firm’s cash flows as well.Sometimes, it would depend upon what kind of a firm investors are trying to evaluate and predict its earnings. In other words, financial services companies (e.g. banks, insurance firms, etc.) are sort of difficult to value because it’s a bit complicated to analyze their cash flows due to unclear definition of capital expenditures and working capital. However, on a large scale investors and analysts should look at more than one parameter (income statements, cash flow statements, etc.) to come up with informed recommendation on purchasing new stocks.

Predicating Stocks Returns

Iconic rock-cut tomb in Hegra, Saudi Arabia

Financial globalization has added considerable value to countries as well as to corporations. Financial globalized markets both have enticed very sophisticated investors and increased liquidity in the markets. When there is a sufficient liquidity in a market, firms will have much more cash to invest or expand their businesses and this would strengthen the economy. With strengthening the economy, plenty of jobs will be created. With the increase of financial globalization, the improvement of domestic financial markets can be accelerated and when there is an accelerating development of a domestic financial market, capital flows can boost the economy.Corporations and countries will benefit from this financial globalization when they attempt to hedge to offset their positions. Also, foreign participation in financial markets would enhance markets deepening, meaning, numerous shares will be bought and sold without any significant effect on the price of stocks. According to Investopedia, unlike thin market stocks, prices of deep market stocks become more stable and less volatile. https://www.investopedia.com/terms/d/deep-market.aspMoreover, the local financial system will be integrated with international financial institutions and markets which would, perhaps, incentivize some countries to adopt some global accounting rules. Such action will make it much easier for firms to prepare their financial statements by utilizing specific accounting standards and policies. With global accounting standards that are going to be followed by corporations, there will be much more transparency. In other words, buying and selling decisions made by analysts will not be poor and inaccurate due to some misunderstanding of the way a firm's financial information recorded.Financial institutions can make a substantial economic development. Several non-financial industries will have the ability to use the money "that is invested by financial corporations" to improve their productivity and/or invent new products. For example, many technology firms might have brilliant and innovative notions and they would hope to turn their ideas into a reality. However, given their lack of cash, they would need to attract those companies to invest in their firm. Therefore, having financial globalization would give those companies choices to raise capital whether from domestic or international venture capitalists.I believe that there will be much more improvement of local market conditions if there are an enormous growth and escalation in foreign financial participation. Noticeably, we see Saudi open its doors even wider for foreign investors to come in and this would promote economic growth. We will have very sophisticated investors who will add more value to the companies by sharing their different experiences and knowledge. Also, another potential advantage of financial globalization is that Saudi financial system will greatly evolve. The government encouragement to foreign financial participation will increase the availability of funds for its citizens which will lead to greater competition.I am absolutely certain that financial globalization poses some challenges and there will be some drawbacks associated with such phenomenon. The most prominent disadvantage is if there is any economic collapse (such as Dot-Com bubble, Wall Street crash in 2008, Asian financial crisis, etc.) known as global systematic risk, it will have a negative impact on the markets. However, I believe that the benefits our market will gain from financial globalization are exceedingly significant.

Financial Globalization! "liberalizing Saudi domestic financial market"

Many economists, investors, lenders, government agencies, corporations, and financial institutions closely monitor Treasury yields (government bond yields). But why?First, let’s define what a Treasury yield is. It represents the annualized return that bondholders earn if they hold a U.S. government bond until maturity. These bonds serve as debt instruments issued by the U.S. government to finance both short-term and long-term operations. Large institutions and investors favor Treasuries primarily for their predictable returns. When institutions seek to balance their portfolios across (debt, equity, crypto, etc.) with low-risk assets or aim to preserve capital, U.S. Treasuries are often a preferred choice.So, how are Treasury prices determined? When the U.S. government issues, for example, a $10 billion bond offering, two main types of buyers participate: noncompetitive bidders (individual investors) and competitive bidders (institutions). Noncompetitive bidders accept the yield set by the government (e.g., 3%), while competitive bidders specify the yield they are willing to accept. After they purchased them, these bonds can be traded in the market, where their prices fluctuate based on factors such as supply &amp; demand, time to maturity, and yields of other securities issued by the U.S government. Please note that the U.S. government does not set bond prices once they enter the market.What does it mean when people say, “The Fed is going to raise or lower interest rates”? This refers to the Federal Funds Rate (FFR)—the target interest rate range set by the Federal Open Market Committee (FOMC), the policymaking body of the Federal Reserve System (the Fed). The FFR dictates the rate at which banks lend and borrow money from each other overnight.Since the Fed controls monetary policy, it can lower the FFR, reducing the cost for banks to borrow from the central bank and from one another. This, in turn, allows banks to offer lower interest rates to consumers and businesses. As borrowing becomes cheaper, demand for loans increases (including mortgages, business loans, and student loans), leading to more transactions, higher economic activity, and ultimately, economic growth.Because of these dynamics, Treasury yields hold significant importance, influencing financial, investment, budgeting, and valuation decisions across various sectors.

(Interest Rate) The Treasury Yield is the Oxygen of the Economy!

financial consultant analysis investment landscape money market

<h2>Understanding Working Capital</h2>For any business, whether a fledgling startup or a seasoned corporation, understanding and managing working capital is crucial. It is the lifeblood that keeps daily operations running smoothly and efficiently. But what exactly is working capital, and why is it so important?Working capital is the difference between a company's current assets, like cash and accounts receivable, and its current liabilities, such as accounts payable. In simpler terms, it is the capital available to fund a company's day-to-day operations. A positive working capital indicates that a company can cover its short-term liabilities, while a negative working capital suggests potential financial trouble (however, in rare scenarios, a negative WC can be favorable as businesses may collect their receivables rapidly and delay paying their suppliers, Apple. Inc is a great example).<figure id="figure-4sr9ch26mm79lqj4j"><img id="4sr9ch26mm79lqj4j" src="https://cdn.durable.co/getty/bGdV7UPn7gwASaHgLxBtEmupglpLPZICuKVvoS92ezwQEaa4rtzWd4zFSpVpIeps.jpeg" alt="financial management" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9;" data-mce-src="https://cdn.durable.co/getty/bGdV7UPn7gwASaHgLxBtEmupglpLPZICuKVvoS92ezwQEaa4rtzWd4zFSpVpIeps.jpeg" data-mce-style="aspect-ratio: 16/9;"></figure><h3>The Components of Working Capital</h3>Working capital comprises several key components, each playing a vital role in maintaining the financial health of a business. These components include:<ul><li>Cash and Cash Equivalents: These are the most liquid assets and include bank balances and marketable securities.</li><li>Accounts Receivable: Money owed to the company by its customers for goods or services delivered.</li><li>Inventory: The raw materials, work-in-progress, and finished goods a company holds.</li><li>Accounts Payable: Money the company owes to its suppliers and creditors.</li></ul>Managing these components effectively ensures that a business maintains sufficient liquidity to meet its obligations and invest in growth opportunities.<h3>The Importance of Efficient Working Capital Management</h3>Efficient working capital management is crucial for several reasons. Firstly, it helps improve a company's liquidity by ensuring there is enough cash flow to meet immediate needs. Secondly, it optimizes profitability by reducing unnecessary expenses and maximizing the use of current assets.A company with strong working capital management can also enjoy increased operational efficiency. By maintaining optimal inventory levels and managing receivables and payables effectively, businesses can reduce waste and improve productivity.<h3>Strategies for Managing Working Capital</h3>There are several strategies businesses can employ to manage their working capital effectively:<ol><li>Optimize Inventory Levels: Implement inventory management systems to avoid overstocking or understocking.</li><li>Streamline Receivables: Use invoicing software to speed up collections and offer incentives for early payments.</li><li>Negotiate Better Payment Terms: Work with suppliers to extend payment terms without incurring penalties.</li></ol>By adopting these strategies, businesses can maintain a healthy balance between their assets and liabilities, ensuring long-term sustainability.<h3>The Impact of Poor Working Capital Management</h3>Poor working capital management can lead to severe financial challenges. Companies may face cash shortages, leading to difficulties in meeting financial obligations. This can result in increased borrowing and interest costs, negatively impacting profitability.<figure id="figure-szxa9lofrhm79lqt6k"><img id="szxa9lofrhm79lqt6k" src="https://media.gettyimages.com/id/1249390843/photo/young-woman-struggling-with-bills.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=76Ebl2H4beHNv9qVn65YlvVwOAVbkSa9tyHQTLvakfQ=" alt="Young woman struggling with bills" title="Young woman struggling with bills" class="object-cover bg-gray-100 rounded-lg md:rounded-xl lg:rounded-2xl" style="aspect-ratio: 16/9; object-position: center center;" data-corners="default" data-aspect="16:9" data-caption="" data-positionx="null" data-positiony="null" data-fullwidth="false" data-mce-src="https://media.gettyimages.com/id/1249390843/photo/young-woman-struggling-with-bills.jpg?b=1&amp;s=2048x2048&amp;w=0&amp;k=20&amp;c=76Ebl2H4beHNv9qVn65YlvVwOAVbkSa9tyHQTLvakfQ=" data-mce-style="aspect-ratio: 16/9; object-position: center center;"></figure>Moreover, businesses with inadequate working capital may struggle to seize growth opportunities, as they lack the necessary funds to invest in new projects or market expansion. This can hinder competitiveness and long-term success.<h3>Conclusion: The Path Forward</h3>Understanding the importance of working capital and implementing effective management strategies are essential for any business aiming for success. By focusing on liquidity, profitability, and operational efficiency, companies can ensure they remain resilient in the face of financial challenges.Ultimately, effective working capital management not only safeguards a company's financial health but also paves the way for growth and innovation in an ever-evolving business landscape.

Insights & Blog

The Growth of Private Credit Market

Understanding Sustainable Investment Options

Predicating Stocks Returns

Financial Globalization! "liberalizing Saudi domestic fin...

(Interest Rate) The Treasury Yield is the Oxygen of the E...

The Importance of Working Capital