For today’s retail investors, traditional asset classes like stocks and bonds – the ones that are normally touted as safer bets – seem to have just as much, if not more, risk and volatility than those alternative assets, like real estate or private credit, that advisors have traditionally cautioned against.
This shift has many causes, like higher interest rates and lower average returns. But no matter the reason, it’s increasingly “wiser” to seek strategies that will capitalize on these opportunities.
These alternative avenues offer diversification and potential returns that are uncorrelated with the larger market. While asset classes like private credit and private equity have typically been restricted to accredited or institutional investors due to their complexities and higher risk profiles, they’re increasingly being offered to retail investors by wealth managers who see unique opportunities for their clients.
Private credit, in particular, is becoming more and more mainstream as a means of securing financing for businesses that fall outside the purview of traditional banks. The returns for “distressed debt” investments are forecast to grow around 14% by 2028, according to a report by Preqin – a growth rate that certainly catches the eye of both investors and wealth managers.
“Distressed debt” investing involves lending to companies that are experiencing financial difficulties or are under significant financial stress on a senior secured basis, and often with superpriority security, and then helping rescue these companies to capture value upside.
Investors in distressed debt are essentially betting that the company will manage to turn its fortunes around or restructure its debt in a way that increases the value of its securities. The trick is to find private credit firms with a proven record of targeting companies with unhealthy balance sheets but hidden “real value” in their business models or intangible assets.
“The modern private credit landscape demands a hands-on approach to managing distressed investments,” says Arif Bhalwani, CEO of Toronto-based firm Third Eye Capital. “Lenders must possess the skills not only to evaluate and mitigate risks preemptively but also to intervene directly and effectively when investments falter. This includes the ability to take over and run distressed businesses.”
Distressed debt investing requires a deep understanding of the company’s business, industry trends, and debt restructuring processes. For firms like Third Eye Capital, this involves taking an entrepreneurial approach to forming partnerships with businesses.
“In this market, companies need problem-solving,” continues Bhalwani. “At Third Eye Capital, we’re focused on finding the latent value in businesses and their assets that others may see as too complex or risky. We’re applying a set of investment principles that we’ve developed over years of partnering with companies, and with building companies ourselves.”
True diversification means having investments that don’t all move in the same direction at the same time. Strategies that incorporate assets that have low or negative correlations with traditional markets offer a buffer against widespread downturns.
Given its benefits, private credit is evolving into a core element of fixed-income portfolios. The alternative asset class offers a blend of income, safety, and diversification that’s hard to find in traditional assets alone. For retail investors, finding firms with a reputation for turnaround success could unlock returns while providing crucial support for struggling companies with healthy business models.
