Investors Cash In On Private Funds That Banks Turned Their Back From
Since the Lehman crisis, the moment when financial markets experienced a crash and vast amounts of money lost, the American economy experienced a dip with banks retreating from lending credit to would-be investors.
But years later, what banks avoided after the Lehman crisis, has exploded into a booming and viable business with small lenders transforming the oldest game in the banking corridors. And making lots and lots of money up to the tune of $1 trillion.
Welcome to the world of private credit. Investors are putting money into their small lending businesses and cashing in on the borrowing-spree bursting from the seams. But where is this money coming from? The source of this money is believed to come from hedge funds, insurance, pension funds, etc.
Most of these money streams into the small private lending businesses and trickles down to regional and small-town businesses. Now, it is a booming industry.
Many traditional lenders retreated from lending credit to small businesses and investors after the grisly Lehman crash, and that is where they went wrong. Today, almost nearly a decade later, investors are gravitating toward private debt, and there’s no way to know when they’ll stop. But what is so alluring with private credit?
One thing you should know is, getting guaranteed quick realistic loans from private lenders are more lucrative than those given out by traditional lenders and big companies. The yields are attractive. And this has encouraged more private lenders to join the bandwagon. Giving out private credit can yield up to 7% to 9% in profits. Corporate bonds yield around 4.3%. You cannot compare the difference.
The yields are what has made the private credit more alluring. More investors are pouring in lots of money into companies that traditional lenders would consider risky. Most of these small companies are looking for money and the investors are ready to lend them.
This lending business has fuelled a global credit bubble that a number of money regulators and central banks or worried about. Investors are after anything that will provide good returns for them. So they are willing to risk more of their assets and money to cash in on the profits.
And so they have set aside so much money to pour into their companies. They lend directly to small businesses and even large corporations. In the last decade, private lenders amassed over 500 billion dollars in profits just from lending money to big companies.
It’s a lucrative business with large corporation’s also borrowing money from the private lenders for credit sustain their businesses. These publicly-traded lenders have also accumulated over 100 million dollars in profits from lending to small-time stock investors. It is estimated by the year 2020, lenders will clock a trillion dollars in profits.
Wall Street gets to work
The private credit business has amassed so much over the last few years and this has gotten the attention of Wall Street investors. In fact, Wall Street is planning to up collateralized loans and I set aside over 20 billion dollars for this project. What the financial engineers plan to do is to transform risky loans, unsecured loans, into security they can trade in.
This lending craze has transformed small-time lending ventures into large businesses within a short period of time. And most of these lending startups are making crazy profits since the lending booming bug took over.
Since the Lehman crisis, private funds have been willing to offer credit to large corporations and small-sized businesses, in turn making hundreds and billions of dollars in profits. So if the banks say no, you are assured private funds will assist you financially.
But even as many private lenders are mushrooming every day, there are lots of risks involved in the business. Experienced private fund lenders know that even as you put in your money to gain more back, you don't get to stretch your risk so far hoping to make more money.
Most of the lenders of these private funds experience risks when they biting too much. So many investors are not getting back their money or profits. To the borrowers, understanding how private credit works is difficult. Most of these businesses do not have good credit ratings.
Perhaps the greatest risks will be experienced when funds disbursed will accrue huge interest rates over time. Until that point where it will be too much for small business and other private borrowers.
According to financial experts, this credit boom will suddenly come to an end just like the Lehman crisis that created a mortgage crisis. It went south bringing down the Lehman Brothers into bankruptcy and numerous litigations to deal with.
And these experts are warning individuals to take advantage of the loophole so the credit boom has created over time. And when that time comes, most investors will regret and it won't end well with many taking up litigations and pointing fingers.
It is a risky business to venture into if you don't understand the risks and how to navigate them. Many private debt lenders have closed shop across America, New York specifically.
The risks that most lenders are likely to experience it's the market itself. It’s becoming too hot for most of them. And getting deals is not easy. Many of them are not doing due diligence on companies and individuals borrowing. So most of them are getting burned in the process
Investors of these lenders also experience the heat, and many of them are likely to lose vast of money when things hit the fan. But it is a wait-and-see situation with many borrowers seeking private funds, and lenders attracting investors who are more willing to cash in on the profits and the lending booming shows promises of great yields.
The truth of the matter is, private lenders, providing credit to small-sized companies and individuals will be around for a very long time. The lending business is part of the 98% of the growth domestic product, and that should tell you something. It has a huge footprint in the financial markets today.