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.
Read more about the private credit market and the importance of tokenization and find the latest financial news of the day, with our companion app Born2Invest.
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.
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.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
First published in ActuFINANCE. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.
The TopRanked.io Weekly Digest: What’s Hot in Affiliate Marketing [1xBet Affiliate Program]
Wanna discover one weird sports betting niche with plenty of low-hanging fruit just waiting for you to exploit? Then read...
Which Are the Most Important Fintech News from February 2024
Monite secured $6 million in a top-up financing round, bringing its total seed-stage funding to $16 million. The funds will...
Spanish Pharma Listed Companies Reduce Their Profits by 37% in 2023
Of the Spanish pharma listed companies, PharmaMar has suffered the most significant drop in profits due to generic drug competition...
How Much Does Europe Invest in Sustainability
Europe is moving rapidly towards a renewal of the regulatory framework for sustainability , with the obligation for almost 50,000...
The German Medical Cannabis Market Could Be Worth Three Billion
Currently, the German medical cannabis market serves a relatively small part of the population, with approximately 28,000 patients, or less...
Africa2 weeks ago
Global Economic Growth in 2024: Eleven African Countries in the Top 20, According to AfDB Report
Fintech4 days ago
BitForex Exchange Suddenly Disappears and No Longer Responds to Users
Mining & Energy1 week ago
Argentina Lithium & Energy Leading the Charge as Demand for Argentine Lithium Grows
Biotech2 days ago
Vytrus Biotech Plans to Triple Sales and Reach 12 Million in 2027