Private Debt
What is Private Debt? Understanding Alternative Lending Options
Private debt refers to loans and debt financing mechanisms that are not traded on public markets. These forms of debt are typically held by a small number of institutional investors or private lenders.
In contrast to public debt, which is issued through marketable securities, private debt is often characterized by more customized terms and may be secured or unsecured.
Types of Private Debt:
- Direct Lending: Loans provided directly to small and mid-sized companies.
- Distressed Debt: Investments in the debt of companies that are experiencing financial or operational difficulties.
- Mezzanine Financing: A hybrid of debt and equity financing that gives the lender the rights to convert to an equity interest in case of default, generally after venture capital companies and other senior lenders are paid.
Investing in private debt offers us the potential for higher returns than traditional fixed-income products, due to the increased risk associated with lending to borrowers that may not meet the standards required by public markets.
| Pros | Cons |
|---|---|
| Higher yields | Higher risk |
| Custom terms | Less liquidity |
| Diversification away from public markets | Requires due diligence |
We understand that private debt can be an intricate component of a diversified investment portfolio.
It is crucial to perform comprehensive due diligence and possess a clear understanding of the terms and risks associated with each investment.
As private debt is negotiated away from public exchanges, transparency and access to information can be more limited, underscoring the importance of expertise in this area.