Interest Rates Remain Near Zero – A Significant Problem for the Wealthy
It has been nine years since the financial crisis and interest rates in the developed world continue to be at record lows. For the wealthy, for whom the inflation rate is typically much higher than the Consumer Price Index (see Forbes’ Cost of Living Extremely Well Index), this represents a significant problem and the search for alternative sources of fixed income continues.
There are equity dividends, yet one takes on market risk (which can be hedged, but it’s expensive). There is property, yet this also bears illiquidity risk and we only have to look back at the financial crisis to understand the limits of this strategy. And there are credit trading strategies, but here again, one would need to take on considerable other risks tied to market conditions and the relative movement of prices.
Seemingly, the only viable option to extract relatively low-risk yields are the private lending markets. Post 2008, a bevy of added regulation and supervision resulted in banks having less appetite to lend. This created a gap between the demand for loans and the amount of available bank lending, forcing borrowers to look for other sources of financing. In 2015, dedicated private lending funds raised more than US$85bn – double the volume of the previous five years together.
With more and more strategies emerging and the ability to diversify across different types of lending and collateral, we feel that the private lending market will continue to grow and offer an excellent source of fixed income.