Private debt refers to loans given to companies by private investors or markets, rather than banks or public markets. Since the 2008 financial crisis, banks have reduced their lending activity – particularly to SMEs – and the demand for private debt has grown. Private debt is an attractive alternative to traditional lending, as it can be structured to suit the needs of the borrower.

Investing in private debt offers the opportunity to target yield, through interest payments and potentially an uplift in the capital value of the company borrowing the money (depending on the structure of the deal). As debt is a lower-risk asset class than equity, the returns are expected to be more modest than that of a private equity investment.

Sources of private debt include:

 

Advantages of private debt

The lending options provided by banks are not always flexible enough to suit the needs of an SME. In contrast, private debt funds are not required  to adhere to the same guidelines as banks, meaning loans can be tailored specifically to SME needs where necessary.

Banks are unlikely to invest in businesses that are in the middle of restructuring, for example, whereas a private lender is often willing to fill that gap. As a result, companies across a wide range of financial conditions are able to secure greater amounts of capital with lighter covenants, depending on the loan type.

Private debt investors are usually willing to connect their portfolio companies with strategic advisors to help their businesses grow, too, whereas banks are more likely to take a hands-off approach in helping companies meet specific goals. Since both parties have direct contact with each other, private debt funders are also more likely to make granular changes to loan structures that can not be paralleled by  more rigid bank lending terms. These slight structural changes in the loan agreement may be all that is needed to push a deal to its conclusion.

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