Private Debt

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

The leverage loan market has grown significantly since the 2008 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 with limited access to bank financing or need more flexibility

Typically those firms are:

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

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 give the investor an opportunity of participating in a significant growth of the borrower

Financial covenants are replaced by an extensive ex-ante screening