Reward and Risk: The Growth of Private Credit Markets

Every company requires funding to gain a foothold in business. But sourcing that funding can be challenging, particularly for those with no more than a nascent relationship with traditional lenders.

Josh Kalish spoke with Financier WorldWide Magazine on the potential risks for entrepreneurs and established business owners of going beyond traditional lending sources.

From the article:

“Generally speaking, bank lending has dried up as a result of both the increased interest rates resulting from the economic policies implemented during the coronavirus (COVID-19) pandemic as well as recent banking crises such as that involving Silicon Valley Bank,” says Josh Kalish, a partner at Farrell Fritz. “This has created a substantial opportunity for private lenders to fill the void left by traditional debt financing.”

“The risks to investors in private credit deals can vary widely depending on the underlying credit profile of the borrower as well as the seniority of the particular credit in the borrower’s debt stack,” observes Mr Kalish. “For example, venture lenders of software companies charge high interest rates as well as other fees to compensate for the default risk.

“In addition to a borrower’s credit risk, investors also assume the risk that, in a default scenario, the collateral may be difficult to liquidate, and therefore, lenders can end up in the undesirable position of taking control of assets that require specialised knowledge to operate,” he continues. “This, in turn, could require them to work out a deal with the existing management team to stay involved, the cost of which in certain scenarios could reduce, or at a minimum delay, the potential recovery available to lenders.”

Read the full article here:

Reward and risk: the growth of private credit markets — Financier Worldwide