private debt
What is private debt?

Private debt or Private Credit is the direct lending by one or few investors in the form of loans or debentures to private or public companies, as opposed to bonds and loans that are issued to many participants and tradable in markets. Private debt opportunities are illiquid investments that generally need to be held until maturity. For the long-term investor who can make this commitment, this can offer attractive yields and returns. 

Private Debt or Private Credit is an important financing tool for medium-sized, growing companies to raise debt capital to meet their growth funding requirements. It’s a debt form of capital which is typically illiquid in nature because it operates outside publically traded markets. Institutional investors choose to invest in private credit opportunities because it provides a stable spread which often benchmarks well against equities, corporate bonds and sovereign debt. In a rising interest rate environment, the added appeal of returns from private debt is the fact that they are protected from this whereas a bond return is fixed and so exposed to this risk. The equity kickers that are often attached to private debt investments provide further equity upside for investors.

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Role of private debt in the lending space

Private debt finds itself in a sweet spot not simply because of the declining role of bank lending. It is also the beneficiary of two unintended consequences of changes in mainstream bond investing. The first is reduced liquidity in bond markets; evidently, it now takes seven times as long for investors to liquidate their bond portfolios. The second consequence is that there has been a shift in issuance from floating to fixed-rate bonds. This is favouring issuers when rates rise. As a result, investors are shifting to private credit markets which still offer floating rate returns. Private credit now has all been set to become an established component of institutional portfolios as it is largely considered a credible diversification tool.

Why private debt? The advantages of private debt
a) High-Income Yield

Private debt transactions aim to generate high and stable income for the investor from the combination of coupon interest and fee income. Several factors help it usually generate higher yields than publicly traded fixed income:

  • Inefficient Markets – private deals will usually have better pricing when borrowers cannot access competitive publicly traded markets, require a customized financing solution, or prefer a trusted or sole lender relationship.
  • Illiquidity Premium – since private debt generally does not trade and needs to be held until maturity, long-term investors can earn an illiquidity premium over publicly traded fixed income when in less competitive situations.
b) Equity Participation

Lenders can often negotiate equity participation through stock, warrants or bonus payments, which can contribute significantly to the overall investment return. Equity upside is common in private debt transactions. This is particularly in junior debt securities, to adequately compensate the lender for the risks.

c) Downside Protection

Private debt generally has lower default rates and losses than publicly traded debt. Some factors for this are:

  • Security and Covenant Protection – private debt investors can structure more security and covenants for loss protection in unique and less-competitive transactions.
  • Information Advantage – private lenders conduct extensive due diligence before investing and have ongoing access to company information to monitor risk. The private debt managers often have board representation or observation rights for their investment companies.
  • Coordination and Control – because there are not many investor participants involved, sole or coordinated private lenders can protect their investments more effectively when negotiating with companies and other stakeholders.
d) Low Volatility

Private debt generally does not trade in open markets so it is not subject to the pricing volatility that public markets such as high yield bonds can exhibit from technical flows.

a) Direct Lending 

Non-bank lenders provide capital to small and medium-sized companies in the form of a secured loan rather than equity. Direct lending refers to a broad spectrum of risk profiles beyond just senior debt.

b) Mezzanine

Mezzanine funding is a private loan subordinate to a senior secured loan but senior to equity in the capital structure of a company. It is typically used by middle-market companies and real estate projects to bridge the funding gap beyond their borrowing capacity from traditional banking sources. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. Mezzanine financing is a loan to the owner with terms that subordinate the loan both to different levels of senior debt as well as to secure junior debt. But the mezzanine lender typically has a legal right enabling them to convert the security into equity at a predetermined price per share if the loan is not paid on time or in full.

c) Venture Debt

These are loans provided to small companies typically startups and growth companies that do not have positive cash flows or significant assets to use as collateral. Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default.

d) Distressed Debt 

Funds mostly buy senior secured loans, of companies with an impending or actual covenant default, in the secondary market at a discount to their face value. Investing by distressed debt combines the best of both worlds — the cash flow of debt investments with the appreciation potential of stocks. Distressed debt generally trades at a huge discount to par value because the borrower is under financial stress and at risk of default. Distressed debt investors typically seek to make money in one of two ways: investing in turnarounds and participating in lend-to-own situations.

List of leading private debt fund managers

The below given is neither a ranking nor performance and size-based list. The list includes the leading fund managers who got dedicated private debt funds under management.

Firm Headquarters
Oaktree Capital Management Los Angeles, US
Goldman Sachs New York, US
GSO Capital Partners New York, US
Intermediate Capital Group Boston, US
Ares Management Los Angeles, US
HPS Investment Partners New York, US
Centerbridge Capital Partners New York, US
Cerberus Capital Management New York, US
Apollo Global Management New York, US
Fortress Investment Group New York, US
KKR New York, US
M&G Investments London, UK
Bain Capital Credit London, UK
Avenue Capital Group Boston, US
Hayfin Capital Management New York, US
Castlelake London, UK
Crescent Capital Group Los Angeles, US
CarVal Investors Minneapolis, US
BlueBay Asset Management Hopkins, US
Golub Capital New York, US


Resources on private equity: 

More resources on Private Equity
– All about private equity – Considerations in selecting a private equity firm
– Private equity Vs Public Equity – Risk consideration in private equity funds
– Private equity offer letter (term sheet) – Glossary of terms and definitions in private equity


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