Why Private Credit?
The private credit landscape has shifted in recent years. In the mid-1990s U.S. bank underwriting covered over 70% of middle-market loans. By 2020, U.S. banks issued or held approximately 10% of middle-market loans. Private credit blossomed following the 2008 Global Financial Crisis (“GFC”) when the SEC tightened restrictions and capital requirements on public banks. As banks decreased their lending activity, private lenders took their place to address the continued demand for debt financing.
Unlike other alternative asset classes, private credit has established a track record of delivering favorable risk-adjusted returns. These opportunities were once exclusive to hedge funds, private equity and pensions, but recent trends have opened the door for individual investors to participate.
With the current U.S. interest rate environment and thesis being “higher for longer” paired with banks being less malleable to borrowers’ needs, this creates the optimal opportunity for private credit real estate investors.
Common Questions
1) Higher Yields
SCM has been able to provide our investors with annual returns of 14-16%, compared to the 7.66% offered by junk bonds.
2) Historically Low Default Rates
Other established private credit lenders have reported a default risk of less than 1.3%. In 2023, Reuters reported that 2-3% of high-yield bonds defaulted.
3) Short-Term Durations
SCM has been able to provide opportunities that mature within 12 months, allowing for greater portfolio flexibility, greater liquidity, and lower interest rate and default risk.
4) Diversification
Private credit returns are not correlated with traditional public markets, such as stocks and bonds, relieving investors from the same volatility changes and increasing value stability.
Why Invest in Private Credit?
While each loan varies due to its customizability, most come with the same primary benefits:
Private credit is a loan given to a business, such as a developer, by any non-bank entity. Most borrowers are mid-sized private firms that need the loan to finance either an acquisition or develop a new site. Their privatization excludes them from raising public debt markets, restricting their options for financing. These borrowers chose to raise capital from private credit lenders due to the flexibility with terms, freedom with customizing loan structures, and a quicker processing timeline. Borrowers traditionally are “middle-market firms” with proven track records, an established market presence, and successful business models.
What is Private Credit?
Determine how much of your investable income you would like to allocate towards private credit and the specific asset classes you would like to invest in. Once you know that, reach out to one of our team members, and will be happy to discuss potential opportunities with you.
How To Invest in Private Credit?
Why Now?
With the expected rate cuts in 2025, it is still unclear whether this will be sufficient for the vast amount of commercial real estate mortgages coming due in the next couple of years. The higher cost of capital and increased need for equity investment will present challenges and potential opportunities for those equipped with significant amounts of dry powder. Additionally, failing U.S. Treasury yields over the past few decades preceding the 2020 COVID-19 pandemic have created attractive conditions for CRE borrowers. These conditions have led to lower interest rate coupons, and higher nominal proceeds, paired with advantageous debt terms. Since 2022, the debt market environment has shifted a full 180 degrees, with banks requiring higher going-in debt yields, higher coupon payments, and lengthy debt terms.
Commercial properties have approximately $5.82 trillion in outstanding debt, with $2.8 trillion slated to mature within the next five years, according to Trepp. Given the current macroeconomic state, these maturing loans will generally face higher interest rates than at origination. The high-interest rate environment has led to many commercial real estate owners seeking subordinate debt in the form of preferred equity. The capped returns and allowance to gain more equity to pay down senior debt provide owners with the ability to become more flexible. With the sustained high-rate environment, private credit is perfectly placed to dominate the marketplace.
Private credit financing are constantly expanding as demand for them has increased. Banks have been retreating from these opportunities due to liquidity constraints, increased regulatory scrutiny, and higher borrowing costs, leaving a void that private institutions are happy to fill. Excess capital flowing into this sector has increased the number of deals substantially, forcing sponsors to rethink their financing opportunities.
Following the Global Financial Crisis, the private credit market has grown from $231 billion in 2008 to $1.7 trillion in 2023, representing a 642% increase.
During the GFC, private debt investments into real estate served as a hedge against economic turmoil and has proven its resilience to market downturns. Private credit transactions were able to provide investors with liquidity, and stable income streams through monthly interest payments, cushioning against market downturns and enhancing overall returns. This historical performance highlights the diversification benefits of including private credit real estate investments in a balanced portfolio. Allowing investors to unlock a unique new avenue for wealth preservation and growth.
Private Credit AUM
SCM has outperformed our direct competitors in the private market, and the public market by 4-5 percentage points. Additionally, we have been able to provide our investors with the opportunity to realize double-digit returns in a shorter investment horizon.
Net Annualized Returns
Unlocking Real Estate Private Credit for Retail Investors
As depicted above, 59% of global private credit funds do not raise capital from outside retail investors, while the remaining 41% do. Of the 41%, only 9% of retail investors utilize these funds.
With a keen understanding of the market landscape, we've identified a gap and stepped in to fill it. Our dedicated team is committed to democratizing access to high-return, stable private credit deals. Through innovative strategies and unwavering dedication, we're breaking down barriers and paving the way for retail investors to seize opportunities previously reserved for the financial elite. At SCM, we believe that everyone deserves a chance to build wealth and secure their financial future. Join us in unlocking the potential of real estate private credit.