Private Credit and Tokenization: a Market Worth Over $1 Trillion

Private credit is set to become the second-largest asset class in private equity. In addition to attractive returns, private loans are also less sensitive to market fluctuations than conventional and public loans. It is in this context that private loans are all the more interesting in the crypto industry, given the significant fluctuations due to speculation in DeFi.

It’s thanks to tokenization, therefore, that private credits could see an even more meteoric rise, over the next few years. Let’s find out how private credits are being transcended by blockchain technology.

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What are private credits?

First and foremost, it’s worth defining what private credit is. Private credit first appeared in the 1980s. But they only exploded after the economic crisis of 2008. Indeed, since 2010, the private credit market has grown from $250 million to over $1.6 trillion by 2023.

A private loan is a loan made by a non-bank lender to private companies (private equity buyouts, real estate, or small and medium-sized enterprises (SMEs)).

Private credit comes in several forms:

Direct loans: companies borrow directly from a non-bank lender. They generally hold the loans until maturity.

Distressed debt: Lenders buy company debt in the hope of profiting from it, should the company recover financially.

Venture debt: This loan is for start-ups with growth potential.

Mezzanine financing: This is a mixture of debt and equity financing. It involves buying up the debts of a company that is unable to pay them. It is therefore riskier.

Special situations: These loans are designed to take advantage of an event or situation unrelated to the company’s growth. This could be a boom in a particular market.

Private credit in DeFi: tokenization

Tokenization is a use case for blockchain technology that enables a good or asset to be digitized. Tokenization has also contributed to the boom in private credit. According to rwa.xyz, the DeFi universe has recorded over $4.4 million in private credit issues. From the beginning of 2023 to last summer.

So private credit is already well established in DeFi. The most important aspect is that tokenization opens up new possibilities for an already fast-growing market.

Tokenization improves several key points for private credits and for investment in general:

Divisibility: by making it possible to divide a loan into several tokens, small investors can invest more easily. This opens the door to much broader investment and capital. An investor can now buy part of a private loan from a lender. In short, tokenization turns an illiquid investment into a liquid one.

Transparency, ZKP, and smart contracts: The advantage of tokenization is that it is deployed on the blockchain.

This infrastructure offers a secure, decentralized space. Investors can therefore avoid going through third parties to obtain private credit. What’s more, there are no application fees. Yet another advantage that opens up this market to all.

Security is provided by a system combining smart contracts and the ZKP (Zero Knowledge Proof) protocol. This technological combination enables investors to invest in a secure and confidential environment. Finally, smart contracts also enable the investment process to be automated.

The benefits of private credits

As a result, private credits combine perfectly with blockchain technology. Above all, tokenization opens the door to investors looking to diversify their portfolios.

Indeed, private credits enjoy two main advantages (as opposed to other public credits): market stability and easy access.

Firstly, as their name suggests, private loans are granted in the private sector (by investing in SMEs, for example). As a result, private loans are not subject to the potential fluctuations of the public market. This low correlation with the public sector gives them greater stability, providing investors with “financial shelter” in the event of economic turbulence.

Secondly, the field of small businesses and start-ups in particular is booming. In addition to being exploited exclusively by many investors with large portfolios. Over 10 years, the annual performance of venture capital returns on start-ups has exceeded +23.8%. This makes them one of the most prolific long-term investments.

Private loans therefore provide access to a high-potential market that was previously inaccessible with traditional loans. Above all, it benefits not only investors but also entrepreneurs, who obtain liquidity to increase their growth. It’s a virtuous investment that benefits everyone and generates economic momentum with high potential returns.

Conclusion

Private credit is one of the best-performing asset classes available. It’s not without reason that the private credit market has grown almost 10-fold in 13 years.

Thanks to the world of DeFi and tokenization, the market could benefit from an even wider pool of assets. Tokenization also offers a reliable, secure, and low-cost infrastructure, thanks to the automation and decentralization of the process.

The revolution has already begun, and private credits in DeFi are increasingly chosen by investors to diversify their portfolios. This could also give a boost to the DeFi market, so obvious are the advantages of blockchain technology.

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(Featured image by Raten-Kauf via Pixabay)

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First published in ActuFINANCE. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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