The Covid-19 pandemic in 2020-22, conflicts in Central Europe and now the Middle East, and the effects of climate change are among the most visible and painful disruptions to markets in the early years of this decade. The disruption that such exogenous shocks bring to national economies and asset markets pose great risk to the security and stability of governments, day-to-day economic activity, and investors’ portfolios. In turn, second order effects such as inflation and its remedies, massive public expenditures, and trade sanctions are altering how companies raise capital and investors generate returns.
The disruptions of recent years are subtly recasting the ways companies attract and secure financing solutions for growth and how investors deploy their assets in search of suitable returns. One recent such development is the rise in private credit as an alternative to conventional bank lending as a source of nondilutive capital for enterprise growth and a stream of premium-rich returns for investors.
A pressing need for investment
As the world confronts an uncertain future, its companies and investors embrace development and innovation in an interconnected economy. Climate change in particular reveals a need for equity financing in infrastructure for energy generation, storage, transmission, and management. The need for investment is clearly present in the Asia-Pacific region, where “annual temperatures have risen faster in the last 30 years than in any other region and are now 0.86°C above the 1981–2010 average,” according to a 2023 report from the Asian Development Bank. The region has endured nearly 40% of climate-driven disasters worldwide – e.g., storms, floods, and landslides caused by precipitation – in the last twenty years. “Ironically,” the report states, the Asia-Pacific region “is responsible for about a half of global annual carbon dioxide (CO2) emissions” due largely to its dependence on carbon-intensive manufacturing industries.
Opportunities for investment in green energy are abundant elsewhere, as well. The military conflict has delivered an energy shock to Europe, and in response the European Union has set an ambitious goal of generating 45% of its electricity from clean sources by the end of this decade, nearly doubling its current share of renewable energy. Through the EU’s Green Deal Industrial Plan, the region seeks to cultivate investment in wind, solar, and other clean technology by streamlining regulation and supply chains through open trade. In the Middle East, the Saudi Vision 2030 plan and other initiatives call for a broad-based modernization of the region’s economies through investment in infrastructure, non-oil-based energy, and a vast array of fintech and consumer offerings. Foreign investment and privatization are cornerstones of these efforts to generate returns and strengthen economies.
The good news is this: The Asia-Pacific region is a leader in clean and renewable energy goods – such as solar panels and wind turbines – and resource-efficient goods that reduce greenhouse gas emissions. “Asia’s trade in environmental goods is remarkable [and] it accounts for more than 40% of the global volume, both as exporter of renewables and importer of environmental management appliances,” according to the Asian Development Bank. And while the region seems to prosper in its clean and renewables import/export business, “its environmental services trade lags far behind other regions, accounting for less than 2% of the global total, suggesting there is great room to develop and cultivate its industrial potential,” according to the ADB’s 2023 report. Similarly, in Europe and the Middle East political and social pressure are driving governments and companies to address the effects of climate change, lead the fintech and other technology industries, and bolster the economic security of their stakeholders.
Solutions to climate change and other externality crises are likely to be driven by private investment under the watchful eye of regulators that seek to put into place the conditions for success and stability, rather than to choose winners and losers. “Monetary policy is often said to be a blunt instrument, not capable of surgical precision,” said Jerome Powell, chairman of the U.S. Federal Reserve, in 2022. The Fed’s instrument is blunt indeed: In the wake of post-pandemic inflation, central banks around the world have raised rates to 20-year highs, stabilizing prices while increasing capital costs substantially. These maneuvers have driven up interest rates for bank loans and spurred additional regulation of banks’ reserve requirements and lending standards. As a result, interest rates are likely to stay higher for longer, conventional loans are more expensive and less available, and companies seeking expansion capital increasingly look beyond banks to private credit.
Private equity lending emerges as a sound alternative to bank loans
As conventional borrowing becomes increasingly costly and restrictive, private equity financing solutions have an opportunity to meet new market demand for credit on favorable terms. Private lenders bridge the gap between enterprises seeking non-dilutive expansion capital and investors in search of diversification, tolerable risk, and healthy returns.
Investors, whether they’re large institutions or high-net-worth individuals, seek insulation from the vagaries of public bond and equity markets, whose returns are increasingly correlated with other assets in the global financial market. They also increasingly seek to deploy their capital toward “good use” – that is, they hope to deploy their capital to finance activities that are likely to generate both positive financial and non-financial outcomes. And, of course, central to investors’ mandate is the need to generate risk-savvy returns in the form of cash flow or asset appreciation.
On the other side of the transaction are the borrowers who produce goods and services. They hope to raise large amounts of capital with which to build the next generation of technology and production methods. Amid a global and competitive market for capital, they seek affordable, convenient access to capital without complexity and time-consuming, distracting oversight. However, banks are less profitable and increasingly regulated, and rates on loans have risen and are unlikely to fall to near-zero again any time soon. Bank loans are harder to get, more costly, and more restrictive.
Equity lending arrangements through an asset management firm have come to provide a solution for both investors and borrowers in the last decade. Through these private financing providers, they’re able to meet the massive requirements of large infrastructure, real estate, or capital-intensive borrowers with loans that are provided outside the increasingly regulated, and at times timid conventional banking sector. Private credit placements can include covenants tailored to the needs of a particular transaction such as seniority and floating interest rates that protect investors from the risk of further rate hikes and are well suited to long-term investors that seek to harvest an illiquidity premium in return for their investment.
Equity-backed financing provides investors with the flexibility to invest on favorable terms amid a shift in bank lending and credit markets. EquitiesFirst has a 20-year track record in providing such solutions, allowing investors to use their shares to raise low-cost funding while maintaining the upside potential from their underlying holdings. This flexibility may well be especially valuable when it paves the way to invest in projects that support energy transition, net-zero emissions, and other responses to the crises of our time. Executed wisely, such investments can deliver both healthy financial returns and nonfinancial outcomes that ultimately contribute to the sustainability of all investments.
Flexible capital for a disrupted time
In the wake of economic disruption and a retrenchment in conventional lending, private credit markets offer brisk access to capital to borrowers that are disinclined to borrow from banks in a higher interest rate environment. Private credit offers investors attractive returns that are insulated from public market volatility. Mr Al Christy Jr, Founder and Chief Executive Officer of EquitiesFirst said, “As conventional channels providing easy access to cash dry up, it pays to be prudent in considering innovative sources of liquidity for corporate and personal needs during these times. In particular, our equity-backed financing under highly favorable terms provides our partners with capital flexibility for their investments and businesses to thrive.” This creative form of capital deployment could hardly be better timed, especially in Asia-Pacific, Europe, and the Middle East, where borrowers and lenders each seek to invest in clean/renewable technology and more general offerings that will benefit these regions, their economic actors, and the world at large.
Learn more about investment opportunities in equity-backed financing.