Private Credit: A Strategy in Impact Investing

In conversation with Peter Melichar , a Private Credit and Capital Markets Specialist

Private credit has become a valuable alternative in the sector of impact investing. This asset class, which involves direct lending by a non-bank lender to businesses, allows investors to deploy capital in a manner that creates measurable social or environmental outcomes while targeting attractive financial returns. This unique combination of investor return with societal benefit makes private credit a powerful tool in the impact investing space.

The growing interest in private credit for impact investing is driven by its flexibility. Unlike traditional equity investments, which often need companies to dilute ownership or meet stringent regulations, private credit provides more direct financing that can be tailored to the specific needs of businesses. “Private credit is versatile,” explains Peter, Founder and Principal at MAYBRD . “It enables customized lending solutions that can be structured to support businesses with or without an environmental mandate.” With sustainability being embedded into investment decisions, businesses seeking to raise capital are increasingly adopting a mandate that prioritizes environmental responsibility.??

A key feature of private credit in impact investing is its ability to support businesses and projects that may not have access to traditional funding or capital sources or may be facing limitations. Many impact-driven projects, particularly those in emerging markets or niche sectors, find it difficult to obtain capital from banks or public markets due to their higher risk or longer potential break even and return timelines. With Private Credit, however, it is possible to offer tailored solutions that address these gaps expeditiously. This could include debt financing with flexible repayment terms, revenue-linked repayments, or subordinated debt instruments that permit higher risk-taking, with higher returns.

“The flexibility of private credit can unlock financing for companies that are impact-focused and sustainability-driven,” expounds Peter. “Through private credit, for example, we’re able to fund clean energy projects in developing countries or scale healthcare solutions in underserved areas in ways that traditional equity or venture capital is simply not able to.”

Success Stories: The Impact of Private Credit

There are many success stories where private credit has been instrumental in creating significant social and environmental impact. One notable example is M-KOPA Solar, a Kenya-based company that provides affordable solar energy solutions to communities that are off-grid. Through private credit funding, M-KOPA has been able to scale its operations, providing solar home systems to over one million customers and offsetting 2.1M Tonnes of CO2. This reduction in carbon footprint constitutes progress in the battle against climate change. The company uses a pay-as-you-go model, so that low-income families can afford solar-powered lights.

Another example is Kiva, a platform that enables individuals to lend to entrepreneurs in underserved communities globally. Kiva’s objective is to expand financial inclusion, and private credit plays a prime role in scaling its lending initiatives. Through partnerships with impact investors, Kiva has been able to reach borrowers in more than 80 countries across 5 continents. Private credit funding has allowed Kiva to offer loans to small businesses in developing regions, empowering entrepreneurs who would otherwise have limited access to capital. Kiva has partnered with multiple microfinance institutions to advance development, uplift communities and empower women.

Financial and Social Synergies

Private credit investments in impact-focused businesses can offer returns that compete with traditional asset classes, while maintaining a firm commitment to achieving social and environmental goals. Many impact investors are motivated by the dual objective of achieving both financial returns and measurable impact. Peter affirms, "The ability to build a sustainable future makes Private Credit a compelling option to meet both objectives."

Private Credit is able to align long-term capital with long-term impact. Unlike other investment vehicles that may be constrained by quarterly reporting, or short-term capital needs, private credit can be structured and deployed with a much longer-term horizon, which is essential for realizing the full impact of certain initiatives. For example, infrastructure projects in developing markets may take several years to become financially self-sustaining, these would benefit from the longer-term horizon that capital from private credit provides. Also, private credit investments can incorporate active engagement and monitoring, enabling investors to track both financial and impact deliverables.??

In summary, private credit constitutes an attractive alternative for impact investors seeking to direct wealth and capital toward solutions that address pressing global challenges, such as climate change, affordable housing and financial inclusion. Through flexible, tailored financing, private credit enables investors to support businesses and projects that propel social and environmental change while achieving returns.

The global impact investing sector is estimated to reach US$4.5 Trillion by 2030. With this growth, private credit will play an increasingly important role in shaping a more inclusive and sustainable future. These success stories and many more underscore the significance of private credit in transforming industries and communities - for Good.