If you’ve heard the term private equity, you’re probably wondering if private credit is another word for the alternative investment product that pools funds from limited investors to acquire and restructure companies. However, while private credit does involve financing companies from private funds, it works very differently and has its unique advantages and risks to investors. In this article, we’ll explain all you need to know about private credit in Nigeria before considering adding this investment product to your portfolio.
What is Private Credit?
Private credit is an asset type that involves lending to businesses by non-bank institutions. Companies that cannot access the public credit market might choose to seek alternative financing sources from private credit loans, which unlike publicly offered company stocks and bonds, are not available to the general public.
Major Differences between Private Equity and Private Credit in Nigeria
1. Unlike private equity, a private credit investor does not own all or part of the company but can impose collateralization to secure the loan and request the borrower to fulfil certain obligations as agreed in the loan covenant.
2. Another difference is that with private equity, profit is only made at the initial public offering of the company or when there is a secondary buyout to another Private equity fund. Private credit on the other hand is a fixed-income asset with agreed interest paid during the agreed loan period.
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