In recent times, access to bank credit has become increasingly demanding. In this context, private debt has been gaining prominence as a key source of financing in different markets, such as small and medium-sized enterprises (SMEs) and the real estate market, among others. This phenomenon, already present in other countries in the region, is beginning to consolidate in Chile as well, driven by the need for financing alternatives and the attractiveness of higher returns for investors.

Reflecting this trend, funds investing in private debt in Chile have registered significant growth since 2017. In that period, the Compound Annual Growth Rate (CAGR) of the assets of Private Debt Funds has been 23%, while that of Real Estate Private Debt Funds reaches 38%.

Changes in the Financial Scenario

In recent years, banks in Chile have progressively tightened their credit conditions and restrictions, especially towards the real estate sector. The rise in interest rates, together with the new capital requirements derived from the implementation of Basel III, has led banks to demand higher collateral and adopt a more conservative approach to risk. This has particularly affected medium and small developers, who are facing increasing difficulties in financing their projects.

In view of this situation, private debt funds - non-bank investment structures that grant loans directly to companies - have emerged as an agile, flexible and increasingly relevant alternative in the local market.

But what is Private Debt and who uses it?

Private debt refers to loans granted outside the traditional banking system, generally by institutional investors, family offices or fintech fintech platforms. Although these loans tend to have higher interest rates than bank loans, they offer greater flexibility in terms of terms, conditions and structures, which makes them an attractive alternative for both issuers and investors.

Real Estate Private Debt: Benefits and Risks

• For real estate real estate developersFor real estate developers, managers and companies, private debt represents a key financing alternative when access to bank credit closes.
• For investors investors, this type of asset offers an investment opportunity with potentially attractive returns - in some cases in excess of 10% per annum - backed by real estate collateral and, in many cases, indexed to inflation.

However, there are also risks, such as:

• High dependence on proper project evaluation and collateral valuation;
• Execution risk in guarantees;
• Lower liquidity, especially if required to exit the investment before maturity.

Outlook for the asset class

All indications are that private debt will continue to gain space in Chile. Macroeconomic uncertainty, combined with a structural need for more housing, creates a favorable environment for these instruments to become institutionalized.

In addition, interest from sophisticated investors and the emergence of technology platforms, which allow loans to be originated and structured more efficiently, are professionalizing the sector.

In conclusion, private debt is no longer just an alternative; it is becoming a structural player in the Chilean real estate ecosystem, boosting the sector at a time when traditional investors and lenders have become more cautious.It is becoming a structural player in the Chilean real estate ecosystem, boosting the sector at a time when traditional investors and lenders have become more cautious.

For developers seeking financing and for investors looking for real returns in an environment of inflationary moderation, this is a space worth watching closely.

DISCLAIMER

José Pablo González

Portfolio Manager Private Debt Fynsa AGF