Private Credit Explained: What Expat Investors Should Understand Before Lending Their Capital

Private credit is lending that happens outside the banks and the public bond markets. A company, a property developer or a specialist lender needs capital, and instead of borrowing from a bank or issuing a listed bond, it borrows directly from investors through a loan note, a private bond or a fund.

For many years this was the territory of pension funds and insurers. It is now offered to individual investors far more widely, usually with a fixed interest rate and a defined term. That combination is attractive to expats who want income they can plan around. It also deserves more scrutiny than it usually gets.

Where the return comes from

A private loan note typically pays more than a deposit or a government bond. That extra return is not a gift. It is payment for three things.

• Credit risk. The borrower may not be able to pay the interest or repay the capital. There is no deposit protection scheme standing behind a private note.
• Illiquidity. You generally cannot sell before the end of the term. If your circumstances change, your money stays where it is.
• Complexity. Each note has its own terms, security and ranking. Two products with the same headline rate can carry very different risks.

If a product pays well above deposit rates and the documents do not make clear which of these risks you are being paid for, treat that as a reason to slow down.

Secured does not mean safe

Many private credit products describe themselves as secured. Security matters, but the word alone tells you very little. What you need to know is what the security is over, who holds it, how it has been valued and by whom, and who ranks ahead of you if the borrower fails.

A first charge over an income-producing property held by an independent security trustee is a very different thing from a floating charge over the assets of a young company. Both can be described, accurately, as secured.

Six questions to ask before you invest

• Who exactly is the issuer, and where is it incorporated?
• What will my money be used for, and how does the borrower earn enough to pay me?
• What happens at the end of the term: repayment, or an automatic rollover unless I give notice?
• Is there security, what is it over, and who would enforce it?
• Can I get out early, and at what cost?
• Who is being paid to sell this to me, and is the issuer connected to the firm recommending it?

The last question matters. Where a firm distributes a note issued by a company in its own group, that connection should be stated plainly in the documents, and you are entitled to weigh it.

How much belongs in a portfolio

Private credit can have a place alongside listed investments, particularly for investors who want income and can leave capital untouched for the full term. It should be sized on the assumption that you cannot reach the money early and that a loss of capital is possible. For most people that means a minority of their investable wealth, spread across more than one borrower.

Expats should also check how the interest will be taxed where they are resident, and in which currency the note pays. A fixed return in a currency you do not spend still leaves you with currency risk.

This article is general information, not personal advice or an offer of any investment. The value of investments can fall as well as rise and you may get back less than you invest. Private credit, structured products and unlisted bonds are higher-risk and are only suitable for investors who can afford to lose the capital they commit. Speak to a qualified adviser about your own circumstances before acting.