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Private Credit

Private credit is where a non-bank lender provides loans to companies, typically to small and medium size enterprises that are non-investment grade. Private credit can serve as a diversifier in a private markets portfolio as debt is less correlated with equity markets. Plus, it allows for a shorter J-curve due to the periodic income component from repayments (See How does private equity work? for more on diversification and the J-curve).

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Private credit in a nutshell

  • Target companies. Though the company stage varies, private credit managers generally lend to non-investment grade, small- and medium-sized enterprises.
  • Investment type. Direct loans - which are senior in the capital structure - with bespoke terms and floating-rate coupons.
  • Value-add operations. Unlike private equity, there is no involvement in the running of a target company. Direct value-add comes mostly from restructuring expertise.
  • Source of return. Private credit firms charge a floating rate spread above the reference rate, allowing the fund and investors to benefit from increasing interest rates

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What is Private Credit?

As regulatory changes have led to traditional lenders - such as banks - stepping away from lending to middle-sized enterprises, private credit managers have seized the opportunity to enter the market, lending to small and medium size enterprises that are non-investment grade.

Target companies are often sourced from a credit manager’s proprietary network. The manager has the flexibility to set its preferred lending terms, typically arranging for protective covenants and collateral to protect against defaults.

Returns are achieved by charging a floating rate spread above the reference rate, allowing the lender and investors to benefit from increasing interest rates. Unlike private equity, private credit agreements have a fixed term, meaning that the “exit strategy” for an investment is pre-defined.

How do Private Credit managers add value?

Proprietary network. A private credit firm’s proprietary network of target companies and entrepreneurs allows them to screen for the best opportunities based on demand, geography, market position, cash flows and management.

Risk management. Enhanced due diligence is fundamental in screening out risky borrowers. Private credit managers will leverage their strong market expertise to provide robust private credit analysis.

Structuring expertise. In case of a default, managers can deploy the required resources to assist companies in the bankruptcy process, helping to extract maximum value for the fund.

Important Information: Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are not guaranteed and may not reflect actual future performance. Your capital is at risk. Please see https://www.moonfare.com/disclaimers

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