New To Investing

Private debt returns are achieved by investing in agreed, contractual streams of cash flows, returns are more or less locked in at the time of purchase. Depending on the type of loan, risk mitigating structures can also be put in place to further reduce downside risk, such as recourse agreements, which essentially allows the lender (FC Capital) to pursue additional assets should the borrower default their covenants.

As debt is a lower-risk asset class than equity, effectively providing capital stability.

Low correlation

Private debt investments rely on a defined stream of principal and interest payments, as opposed to public market fixed income investments whose values fluctuate in part with changes in sentiment, interest rates and macro-economic influences. Because they are uncorrelated with traditional asset classes, private debt as an investment is a valuable tool for diversifying investment portfolios.

Income earning element

Private debt investments rely on a defined stream of principal and interest payments, received from borrowers at specified intervals under the binding terms of their debt contract. A floating base rate, with additional credit margin, ensures total interest income rises in line with upward movements in market interest rates when interest rates rise as a means of combating inflating pressure, essentially acting as an ‘inflation hedge’.

This contrasts with dividends that are paid to equity holders at a company’s discretion. Even when equity markets were at their most turbulent in early 2020, and many companies were suspending or reducing dividends, well managed private debt funds continued to deliver consistent monthly income for investors.

Capital stability

In a private market, lenders negotiate directly with borrowers. A skilled lender/private debt manager will seek to negotiate with the borrower appropriate terms and conditions, controls, reporting obligations, covenants, and security to ensure the lender has greater influence on loan terms seeking to mitigate potential risk of loss. Covenants and ongoing borrower reporting obligations are negotiated and provide protection and early warning of changing risks. Security held over the borrower ensures the rights and protection of capital ranks in priority to shareholder equity and any unsecured creditors.

Diversification

Private debt provides a low correlation with other major asset classes, including growth assets such as equities and property, as well as other fixed income products such as bonds, providing excellent diversification opportunities.

Because they aim to deliver reliable income and capital stability throughout the economic cycle, they can be an asset to your portfolio when other markets are volatile.

Lack of liquidity

Investors in private credit must be willing to hold their investments until maturity. Whereas traditional fixed income investors can count on liquidity because of the market for government and corporate bonds, private credit investments do not offer this flexibility.