Private Debt Categories

Direct lending: Senior debt with priority claim on cash flows and assets Mezzanine: Junior debt with higher rates and often equity participation through warrants Distressed: Debt of troubled borrowers acquired by turnaround specialists Categories differ by amount of equity participation and expected returns

Expected Returns and Risks

High single digit returns from credit spread minus losses and fees Credit risk from highly leveraged middle market company borrowers Liquidity risk as loans cannot be easily traded without discount Performance closely tied to economic cycle and private equity success

During booms, lenders compete and offer tight spreads with favorable terms Downturns see spreads rise quickly in anticipation of increasing defaults Defaults often concentrate in sectors that expanded rapidly with debt Recovery depends on business quality, covenants, and lender workout expertise

Manager Selection Factors

Track record of performance and ability to manage credit losses Origination capability through established relationships and reputation in market Adequate staffing and expertise to handle portfolio workouts effectively Capital discipline especially important at end of credit cycles

Private debt offers higher yields than public fixed income with floating rate protection Credit cycle timing significantly impacts returns through spreads and default rates Manager selection critical given substantial market growth and increased competition Understand credit risk from leveraged borrowers despite senior loan protections

Primer on Private Debt

Curated by: Rubric Advisors

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What is Private Debt?

Debt not financed by banks or issued in public markets
Provided by private lenders who underwrite and structure customized loans
Most commonly provides debt to private equity-owned companies (direct lending)
Banks limited this lending after financial crisis to mid-size borrowers
Offers higher yields but carries significantly more risk than bank loans

Direct Lending Investment Appeal

Floating rate structure provides protection against rising interest rates
Senior position and covenants offer downside protection in capital structure
Higher yields than safer fixed income assets to compensate for credit risk
Call protection fees compensate for early repayment risk from refinancing
Lower observable volatility due to illiquid nature and infrequent marking

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What is Private Debt?

Private Debt Categories

Direct Lending Investment Appeal

Expected Returns and Risks

Credit Cycle Impact

Manager Selection Factors

Key Takeaways

Related Topics

Bond Basics: How Fixed Income Works

Fund of Funds: Diversified Access to Alternative Investments

High Yield Bonds: Understanding the Risk–Reward Tradeoff

What is Private Debt?

Private Debt Categories

Direct Lending Investment Appeal

Expected Returns and Risks

Credit Cycle Impact

Manager Selection Factors

Key Takeaways

Related Topics

Bond Basics: How Fixed Income Works

Fund of Funds: Diversified Access to Alternative Investments

High Yield Bonds: Understanding the Risk–Reward Tradeoff