Private credit investing is an alternative investment which offers sophisticated investors the opportunity for high yield, high risk, fixed income returns. For expats and non-UK residents it brings with it additional complexities and opportunities
Private credit is an alternative investment that enables private companies to raise capital provided by finance professionals (e.g. private companies or hedge funds) or high net worth individuals/sophisticated investors, instead of traditional lending sources such as banks.
While it is sometimes referred to as private debt, private credit enables sophisticated investors and financial professionals to diversify investment portfolios into higher-risk opportunities offering fixed-income returns in the form of interest payments.
This article seeks to provide an overview of private credit investments, tailored to British expats who are not considered as tax resident in the UK. This article should never be considered as “advice” and due to the high-risk element of alternative investments, independent financial advice should always be taken before making any investment decisions.
The concept is relatively simple in that an investor or series of investors (through private companies for hedge funds) will provide a loan to private companies at a specific rate of interest. The return on investment will be delivered in the form of interest payments which will be seen from a tax perspective as income and therefore typically be subject to income tax rules in the relevant jurisdiction(s).
Private credit is attractive to investors because it will typically offer higher rates of return than traditional investments in the form of fixed income. This source of financing is also particularly interesting to private companies as an alternative to borrowing from banks who have increased restrictions around their lending criteria, making it hard for private companies to raise capital through debt.
Private credit investments also carry a much higher risk, as the investments are typically unregulated and have historically been subject to scams and fraud. This means significant due diligence should be carried out by the investor to ensure the investment matches their personal risk appetite.
For this reason, investment in private credit should only ever be considered as a smaller percentage of an overall investment portfolio, typically never rising above 15% of an investor's total portfolio.
The amount borrowed will typically be between £10m and £200m and will normally be raised from a high net worth individual or group of investors through a private company or finance professional such as an independent financial advisor.
Private credit investments are available only for finance professionals and sophisticated investors.
Examples of finance professionals would be hedge fund managers, independent financial advisors and wealth managers who all manage a collection of funds from a number of smaller investors. The finance professionals will make the investments on behalf of their clients and provide additional financial services to them, such as establishing a risk profile and long term business plan.
The finance professional’s role is to manage their client’s investments in line with their client's interests and risk appetite, while also conducting due diligence on any investment opportunities to minimise the potential risks.
A finance professional’s clients do not have to be sophisticated investors, however, to invest in private credit investment opportunities an investor would still need a significant net worth as it is only recommended that a small proportion of a total investment portfolio is invested in high-risk investments, such as private credit.
It is ultimately the role of the finance professional to provide independent advice to their clients to minimise the risks of any investments, while maximising the returns. While they offer no guarantees for non-UK residents, additional caution should be applied due to the lack of financial regulations (i.e. if they are non-UK based, the FCA will have no regulatory jurisdiction over the finance professional) which means an investor must do extra due diligence around fees, costs and tie in periods before making any decisions.
A sophisticated investor/high net worth individual would typically be an individual with investment experience who has a total net worth over £250k (excluding property considered their primary residence) and/or an annual income in excess of £100k.
Despite being a sophisticated investor, it is always worth speaking to an independent financial advisor before making any investment decisions due to the increased risks alternative investments carry.
It is also important for all investors to remember that they should only be prepared to invest an amount they are comfortable investing in private credit. Often this is advised to be limited to 15% of the total investment portfolio due to the high-risk nature of the investments.
A typical borrower would be a small to medium-sized private company with an EBITDA (earnings before interest, taxes depreciation and amortization) of between £5m and £100m. The borrower will not be specific to any particular industry, although traditional industries with strong growth records will tend to be more attractive to investors.
Borrowers seek private credit for a range of reasons, including:
Due to the nature of private credit, the returns for investors are considered loan repayments and therefore only the interest on the repayments will be subject to tax.
The interest paid will be considered as income, rather than capital gain, and therefore be taxed as income in both the jurisdiction where the payment has arisen (typically the country of the borrower) and the jurisdiction where the payment is received (typically the country of the lender/investor).
It is therefore vital to get specialist advice from both an experienced financial advisor and tax specialists in each jurisdiction to ensure that the correct tax rules are followed and any double tax treaties are correctly applied to minimise the overall tax liability.
It might be possible for the investment to be structured in such a way, such as an investment bond, that interest payments remain within the bond and are therefore not subject to tax until an income is drawn from the insurance bond itself, allowing interest payments to be accumulated and reinvested before being subject to tax.
There may also be ways to minimise tax exposure through the creation of corporate structures in tax beneficial jurisdictions, or through the creation of international pension schemes.
However, extreme caution should be exercised, and professional advice must always be sought to ensure the tax rules are followed in each jurisdiction and any future plans, such as relocation to different countries, are also taken into consideration.
Private credit investing is only directly available to finance professionals and sophisticated investors. However, if you have a total net worth under £250k or an annual income under £100k you may still be able to diversify a small proportion of your portfolio into private credit investments through a trusted finance professional.
Even if you are a sophisticated investor, if you are looking to invest in private credit for the first time, it is highly recommended that you seek advice from a trusted independent financial advisor before making any investment decisions.
At Experts for Expats we provide free introductions to an independent financial advisor who should be able to assist you.
As part of our introduction service, our trusted hand-selected partner will offer you a free consultation to discuss your situation and provide you with an overview of their fees, services, qualifications and experience to enable you to decide if you would like to proceed with a formal arrangement.
Once the free consultation is completed, they will detail any next steps including the creation of a report which will identify your risk profile and set out your financial objectives in the short, medium and long term. They will also provide you with investment recommendations, including potential private credit investments, which you are under no obligation to proceed with.
All fees and charges will be carefully explained, and any investment opportunities will be aligned with your financial goals and objectives.
