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A growing group of impact investors are seeking assets that align with their social priorities. One of the easiest ways to do so is with private capital, which can enable small and medium-sized businesses to develop and thrive. As a result, the communities home to those businesses also flourish.
Private credit allows businesses to access capital without the need for a bank. With this option – sometimes called direct lending – a company can source financing from a non-bank entity that offers unique advantages like speed of execution and a customized structure that suits the business’s specific needs. Here, “private” means the debt is not traded on the public market.
The rising popularity of private credit has a material impact on job creation because when more small businesses can access capital, there are more opportunities for economic growth within communities, leading to more hiring. Consider research from EY showing that “the economic contribution of private credit to the US economy in 2022 was an estimated 1.6 million jobs earning $137 billion of wage and benefits.”
Here, we look at ways private credit drives societal good.
The reporting from EY shows just how impactful private credit has been to the US economy. In addition to creating an estimated 1.6 million jobs, private credit has generated $224 billion in GDP. The size of these numbers is due, in part, to the knock-on effect of private credit due to job creation outside those businesses.
For example, suppliers are downstream beneficiaries because their business grows as they serve companies supported by private credit. Specifically, companies receiving private credit added 545,000 jobs, related suppliers added 406,000, and related consumer spending supported 645,000 jobs.
While these numbers illustrate job creation at the national level, the real value is evident at the community level. When businesses can access capital, they can develop and grow. This growth—which leads to more employment—drives consumption and well-being.
Ultimately, the benefits of private credit reach investors. According to Goldman Sachs data, “over the past decade, the asset class has generated higher yield than most other asset classes, including 3-6% over public high yield and broadly syndicated loans.”
Private credit allows minority entrepreneurs to access capital that they might otherwise not be able to obtain through banks. Additionally, private credit offers greater speed of execution and certainty. Moreover, private credit often allows companies to access more capital than possible through traditional banks. Businesses also enjoy more flexible covenants and more stable relationships with the lender.
The convenience of private credit is mainly due to the fewer regulatory restrictions involved at a time when traditional banks have become increasingly risk-averse. Research from the Federal Reserve Bank of Dallas found that the 71 banks they surveyed significantly decreased their lending. This decrease in activity is due to concerns related to recent bank failures and declining consumer confidence. In contrast, private credit providers are not nearly as sensitive to these macro factors. As a result, small businesses can source the funding they need.
The option of private credit is crucial to the success of the US economy, which is home to over 33 million small businesses and employs more than 61 million people. This portion of the country represents the communities that get to share the success of small
businesses that succeed due to private credit. Consider that in the third quarter of 2023 alone, businesses with 1 to 49 employees experienced a net employment increase of 204,000 compared to a net increase of just 26,000 for firms with 50 to 249 employees according to the U.S. Bureau of Labor Statistics. In fact, small businesses contributed 55% of all net job creation for the decade spanning 2013 to 2023.
The US economy is cyclical in nature and will always have periods of downturn. During these periods, small and medium businesses need capital the most. Private credit allows these owners and entrepreneurs to prevail, even when macro forces are against them.
Many middle-market companies would have risked failure without access to capital via private credit during the 2007-09 financial crisis. Today, however, many of these businesses are growing because they gained the confidence of private credit providers when banks closed their doors.
The power of private credit is that it empowers businesses with a direct relationship with their surroundings. As a result, private credit has a more substantial and immediate influence on societal good than large banks that rarely create opportunities for success at the local level. Put simply, private credit channels capital to communities.
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Today, job creation among businesses and their suppliers is increasing due to non-bank lending. AVANA Capital is proud to be part of this trend by serving entrepreneurs and, by extension, the communities in which they operate.
By providing capital, we provide these small and medium-sized businesses with a foundation for growth that drives employment, income growth, and business expansion.
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At AVANA Capital, we provide the speed, flexibility, and ongoing support that enables borrowers to put capital to use efficiently. Our 150+ years of combined experience has empowered businesses to succeed in commercial real estate sectors like hospitality, multifamily and industrial/self storage.
Our high-touch approach makes us more than a funding source. We develop partnerships with borrowers, giving them access to the full range of services we offer.
For more information on AVANA’s investment opportunities, please contact Cathy Ellsworth, EVP-Investors Relations (cathy.ellsworth@avanacompanies.com / 602-357-0497)