What is Private Lending?
Private equity lenders are often your saviour when traditional lenders refuse loan requests that don’t meet their terms. Private equity lenders are backed by private money of people who want a fixed rate of return so they provide private equity loans as against making investments in the stock markets. These private equity loans are given against property or assets. These are provided on the assumption that the borrower is ‘very likely’ to pay back the amount he is borrowing. Mostly private lenders fund these private equity loans at higher rates of interest because of the risk involved in giving out such loans.
The loan makers: While private equity firms have jumped into the lending space, insurance agencies, family-run offices, and public pension funds are also few of the investors who are backing private credit massively. While earlier private credit was limited to small to medium-sized companies, lenders are now giving bigger loans. These loans may be indirect or direct. The private lenders are in this market because of the lure of promising returns.
What’s in store for the borrower: Borrowers definitely get to avail better terms and conditions from private equity lenders vis-à-vis banks as the former operate solely for giving loans to businesses. It is also simpler for the borrower to acquire loans through this medium.
Capital preservation and return maximization are the two broad strategies used under the private credit umbrella.
Capital preservation: Strategies such as mezzanine and senior debt funds are aimed at protecting losses and for delivery of predictable returns.
Mezzanine are basically managers who are in agreement with private equity sponsors to provide funds to acquisitions or finance buyouts. Mezzanine or Mezzanine funds have lock-up periods of 8-10years.
Senior debt funds are nothing but direct lenders who are very similar to mezzanine lenders in terms of the investment approach. These lenders depend on private equity managers to help finance platform company expansions and buyouts. A majority of their returns come from current cash pay coupons which are comprised of fixed reference rate and fixed credit spread.
Return-maximizing: Such credit strategies aim at generating returns similar to private equity by buying distressed credit instruments or performing instruments.
Capital appreciation strategies are mostly similar to equity and many a times work towards replacing private equity. Entrepreneurs or families in need of capital who are apprehensive about giving up control look towards subordinated capital appreciation providers or structured equity for their financing requirements.
Distressed Credit or distressed corporate credit managers have middle-to-large-capital companies on mind. They buy debt securities which are highly discounted. Most of these managers try to get returns by way of negotiation, using the leverage provided to them as creditors under the current bankruptcy code.
Besides the above listed strategies, there are a wide variety of credit strategies that need to carefully evaluated, in order to check if they lean towards return maximization or capital preservation or both. These are called Credit Opportunities. These may include specialty lending, distressed credit, rescue financing etc.