Private debt has only recently been considered an asset class and covers a range of investment styles. 

We can arrange financing from a few EUR m to EUR 1bn.

The term Private debt is typically applied to debt investments which are not financed by banks and are not issued or traded in an open market. In the context of debt, ‘Private’ refers to the investment instrument itself and not necessarily the borrower – both public and private companies alike are eligible for the asset class. 

Private debt falls into a broader category termed ‘alternative debt’ or ‘alternative credit’, and is used interchangeably with ‘direct lending’, ‘private lending’ and ‘private credit’.

Within the private debt market, investors lend to investee entities – corporate groups, subsidiaries or special purpose vehicles established to finance specific projects or assets – in a similar manner banks do. 

 

Private debt instruments are typically associated with: 

• Event financing 
• Turn-around stories 
• Growth capital 
• Dividend recap 
• Restructurings 
• Cap extensions 
• Any non-typical financial situation

The leverage loan market has grown significantly since the Great Financial Crisis when the market dried up and issuances slumped to record lows. As the global economy recovered, the leverage loan followed – to a satisfaction of the investors hunting for yields. 

 

Private debt is an option for the companies which don’t have access to the loans offered by the banks or need more flexibility.

Typically those firms are:

• In the SMB sector
• R&D intensive
• More volatile
• Sometimes yet unprofitable

Higher risk taken by nonbank lenders leads to higher interest rates. The average difference in interest rates is around 200 basis points. This difference is even larger at the zero-EBITDA boundary, where the nonbank interest is around 600 basis points higher.

 

Different lenders appear to use different lending techniques. Nonbank lenders are significantly less likely than banks to include financial covenants or performance pricing provisions in their loans. Thus, rather than relying on financial covenants to monitor borrowers’ ex-post performance, nonbank lenders engage in extensive ex-ante screening. This is especially the case for loans offered by asset managers.

Most nonbank lenders, except for investment banks and insurance companies, are significantly more likely than banks to use warrants and convertible debt​

Higher risk taken by nonbank lenders leads to higher interest rates

Warrants or convertible debt instruments give the investor an opportunity of participating in a significant growth of the borrower

Financial covenants are replaced by an extensive ex-ante screening