Investing is an art, a blend of strategy, risk assessment, and anticipation of returns. In this world of financial markets, one of the lesser-known but potentially highly rewarding investment avenues is private debt. Contrary to popular belief, private debt can offer superior returns compared to traditional investments like stocks and fixed-income options. In fact, according to a recent report from Pitchbook, private debt had a return of 4.2% while stock and fixed-income investments had double-digit negative returns for the 2022 calendar year. This blog will delve into the reasons why private debt can be an attractive investment choice for those seeking higher returns and how AXIS by AIO Logic can help private lenders maximize their potential returns.
Yield Enhancement through Risk-Premium:
Private debt often involves lending to entities that may not have easy access to traditional banking or public debt markets. Due to the perceived risk associated with these entities, they are willing to pay a higher interest rate to attract investors. This risk premium can significantly boost the overall yield on private debt investments, providing higher returns to investors.
Lenders using AXIS by AIO Logic can further reduce the potential risks associated with lending to these entities. In addition to ratio monitoring and analysis, AXIS automatically and dynamically performs trend analysis on borrower financial data. If AXIS detects deteriorating financial trends, (e.g. decreasing profit, decreasing liquidity, etc.), an alert is triggered on the Portfolio Manager dashboard, allowing lenders to take proactive measures if needed.
Customization and Flexibility:
Private debt allows for tailored lending agreements that can be customized based on the specific needs and circumstances of the borrowing entity. This flexibility enables investors to negotiate terms that suit their risk appetite and desired returns. In contrast, traditional fixed-income investments often come with standardized terms, limiting the ability to tailor the investment to one’s preferences.
The ability to customize loan structures is crucial to generating positive returns on loans. That’s why we’ve made it easy to customize loan structures in AXIS by AIO Logic. From the Loan record in AXIS, lenders can customize the loan structure, choosing from structures such as full/partial/custom amortization, interest only with balloon, delayed draw, revolving, borrowing base, and factor rate. They can also customize interest rate structures, choosing from structures such as current and PIK interest, fixed and variable interest rates, and changing interest rates.
Collateral and Asset Backing:
Private debt is often secured by specific assets or collateral, providing a layer of security for investors. In case of default, investors may have a claim on these assets, potentially mitigating losses. This added security can attract investors looking for a more secure form of investment compared to stocks or unsecured bonds.
For investors interested in issuing a loan backed by collateral or other assets, AXIS by AIO Logic has all of the functionality required. This provides lenders with the flexibility to offer various loan types based on the given situation or the needs of the borrower. Additionally, this functionality allows user of AXIS to capitalize on a wider range of borrowers, leading to increased revenue capabilities.
Less Sensitivity to Market Volatility:
Stock prices can be highly volatile and influenced by a myriad of factors including economic conditions, geopolitical events, and market sentiment. Conversely, private debt investments are less susceptible to these fluctuations as they are based on negotiated terms and the financial health of the borrowing entity. This stability can be appealing to investors seeking a more predictable return profile.
Users of AXIS by AIO Logic also enjoy additional stability thanks to the financial analytics tools included in the platform. AXIS provides sophisticated financial spreading and analytics functionality for both underwriting and ongoing financial monitoring. Once financials are spread into AXIS, the platform automatically performs vertical, horizontal, and trend analysis, and calculates 42 financial ratios to score the borrower’s financial health. These tools ensure that lenders are always aware of the financial health of the borrower throughout the life of the loan, so they can take preventative measures if needed.
Including private debt in an investment portfolio offers diversification benefits. Diversifying across various asset classes, including private debt, can help spread risk and potentially enhance overall portfolio returns. A well-diversified portfolio with exposure to different risk-return profiles can provide stability and attractive returns, mitigating the impact of market volatility.
Analyzing their lending portfolio can be made easier for investors who use AXIS by AIO Logic, which offers a robust suite of automated portfolio reporting and analytics. Standard portfolio analytics features in AXIS include static pool and collection analysis, portfolio stratification, concentration testing, and portfolio performance KPI tracking. In addition to this standard suite of features, customized portfolio reporting and analytics can also be created.
While stock and fixed-income investments remain popular and fundamental components of investment portfolios, private debt offers a distinctive avenue for those seeking potentially higher returns. The yield enhancement through risk premiums, customization, asset backing, reduced market sensitivity, diversification, and niche investment opportunities make private debt an attractive choice for the discerning investor. It’s essential to conduct thorough research, understand the risks involved, and align investments with one’s financial goals and risk tolerance to reap the benefits of private debt investment. If your firm is ready to enter the private debt market, or simply want to automate and optimize your private debt operations, please feel free to contact us today to schedule a free demo!