Private debt covers the lending of money to companies and individuals by entities other than banks.

Traditionally companies would borrow exclusively from high street banks. Since the financial crisis in 2008, high street banks have been consolidating their activities and devoting less resources to lending to small companies.

Private debt involves the lending activity carried out by entities other than banks. This can include both Peer to Peer lending as well as lending by more specialised entities and companies that focus on particular segments of the economy. The private debt market continues to grow as the demand for private debt from companies prevails and new sources of capital are available to provide that financing.

What is a private debt fund?

A private debt fund specialises in lending activity and raises money from investors and lends that money to companies. It represents an alternative to bank lending as well as providing investors with exposure to the more bond-like returns occurring from private debt as an asset class.

Investor interest in private debt is increasing because of the low yields available from government bonds. This means that many institutions are being forced to seek alternative sources of yield from a market with interest rates still at a record low.

A private debt fund does not invest in public markets like stocks. Instead it provides and manages a portfolio of loans which can be of various sizes and worth many millions of pounds. A private debt fund will typically employ lending teams who have strong backgrounds in commercial banking and expert knowledge of the market they work in. There are many individuals of this calibre who have made the move from banking into fund management in recent years.

Private debt vs private equity

Private debt covers loan finance which is when money is lent to a company to fund ongoing operations or the improvement of infrastructure. Frequently the loan will be secured against an existing asset, like property, but private debt funds do not seek to own companies. Private equity funds, by contrast, will typically own some or all of a company.

Private debt funds can sometimes be open-ended, while private equity funds will often be closed-ended and with a limited lifespan. Private debt generates returns from interest in loans, while private equity funds seek to generate returns by increasing the value of portfolio companies.

Further reading

Below are some related articles.

Prestige: Private Debt / Direct Lending Strategy Update

Morgan Stanley: An Introduction to Alternative Lending

PwC: Alternative Lending – Asset Class Characteristics

AIMA: Prestige – The Challenges for UK SMEs

AIMA – Alternative Credit Council: Financing the Economy 2017

AIMA Journal: Q2/2017 Edition

AltFi News:
A proper bank replacement. An interview with Nucleus boss Chirag Shah
Institutional investors will raise allocations to alternative credit due to Brexit and Trump

Financial Times: Investors take a shine to UK agriculture

Deloitte: UK alternative lender deal tracker

KPMG: Loan Funds Survey

Reuters: Pension schemes pour money into European direct lending

IPE Real Assets: Brexit analysis: private debt to be stand out winner

HFM Investhedge: Four London councils seeking to allocate to private debt

Goldman Sachs: The future of finance