Securing capital is integral to the growth of any business and companies typically explore two primary avenues: debt financing and equity financing. While debt financing often involves traditional banks and capital markets (like issuing bonds or commercial papers), these channels are exposed to stringent regulatory hurdles. Private credit has evolved to be a more flexible alternative for businesses to access capital to finance their growth and operations.
Private credit is a form of financing where non-bank institutions provide loans and other financing options to companies. They are alternatives to traditional bank loans and are often favoured by small and medium-sized enterprises (SMEs) that may not qualify for conventional financing.
The Nature of Private Credit
As regulatory pressures mounted on traditional banks, their ability to provide flexible financing solutions became increasingly constrained. Private credit, as a financing option, emerged in the 1980s but its popularity can be traced to the aftermath of the 2008 financial crisis. In Nigeria and in other parts of the world, banking is a highly regulated industry, and banks are under strict regulations to maintain mandated Cash Reserve Requirements (CRR) and Capital Adequacy Ratios (CAR). This regulatory environment, coupled with banks’ natural risk aversion when dealing with deposits, created a huge market gap—one that private credit firms were uniquely positioned to fill.
As Matt Levine humourously illustrated in a Bloomberg article, if you go to borrow money at JP Morgan Chase & Co, one of the largest banks in the world, the bank will probably say “yes, I would be happy to help you find that money”, but if you go to an asset management firm offering private credit options to borrow money, the firm would pull out a bag with a dollar sign on it and say “yes, here is the money”. The point being that a bank may not actually have a lot of money to satisfy the funding requirements of a borrower but a private credit firm may have that kind of money. Even if a bank has that kind of money, it is constrained by laws and regulations on how much it can lend at any given time.
