Investing in private loans on Heron, also called “private credit”, provides a more predictable income stream compared to stocks, which can be highly volatile and do not guarantee dividends. This yield is also particularly attractive in a low-interest-rate environment, where traditional bonds may not offer sufficient returns to meet investors' income goals.

By including Heron Finance in your portfolio, you can achieve a more balanced risk-return profile, with the potential for steadier income and lower overall volatility compared to a portfolio solely comprised of stocks and bonds. See Recommended ratios for alternative assets to inform your decision on how much to include in your portfolio.

While private credit returns are historically higher than traditional fixed-income investments like bonds, and more stable than stocks, they do come with some unique risks that Heron Finance mitigates in multiple ways described below. To understand the risks holistically, let’s look at a few dimensions of risk and volatility when it comes to investing in private loans on Heron.

The loans on Heron Finance are managed by experienced credit funds with strong track records. Historically, they have had <1% annual “loss rates,” which refers to the percent of loan principal that isn’t paid back, thereby reducing the overall interest you receive. These funds take numerous steps to mitigate risks, including strong loan structuring and closely managing their relationships with borrowers.

Despite every precaution, though, one of the main risks of private credit as an asset class are defaults: the unfortunate scenario where end borrowers cannot repay their loans. This can be due to the macroeconomic risk of the broader economic conditions, or to the specific default risk of the borrower and its business operations. In default situations, the credit funds work with the borrowers to pursue recovery as much as possible.

There are two ways Heron Finance mitigates the risks of default. The first way is with loans that are structured to improve the possibility of recovery. Many of the loans are in the “senior” tranche, which means the borrower must pay back those loans before paying back other loans. In addition, we automatically diversify your portfolio across many borrowers, so that any single default has a small impact on your overall return.

Part of what drives the above-market returns in private credit is the “illiquidity premium.” Unlike corporate bonds and other securitized loans, private loans are relatively bespoke, and therefore lack a robust secondary market for trading them. Generally, these loans are originated by credit funds and stay on that fund’s balance sheet until the loans mature. For this reason, private credit returns are higher than rates seen in more liquid lending markets.

At the same time, this means private credit has what is called “liquidity risk”, which is the risk that your investment is locked up for longer than expected. Related to this is the risk that while waiting for a loan to mature, market interests rates can change and make the returns of the loan less attractive relative to the market.

Heron Finance minimizes this risk by offering a liquidity program, where we set aside capital to buy back performant loans from investors on our platform. You can read more about our liquidity program here. Since we can never guarantee liquidity, investors should understand and be comfortable with this risk. In addition, many of the loans are structured as “floating rate”, which means the interest rate automatically changes when the broader market interest rates change.

For a more detailed explanation of the risks involved with private credit, see our articles: