Private Debt

Private Debt

What is Private Debt?

When a Private Equity firm buys a company, they will typically require some form of a loan to complete the transaction. 

Private Debt funds do what banks used to do – they make loans to high quality, established companies with the intention to generate interest on those loans.

These are large companies, typically with revenues well in excess of £50m, often far higher.

Why do Private Debt Funds exist?

Since the financial crisis, banks have found themselves unable to lend as much as they used to.  This is a problem for private equity investors who rely on debt to finance their investments. 

As a result, there has been a sea change in the way private equity owned companies borrow money.  In both Europe and the U.S., banks have continued to retrench from the lending market

Source: European Banking Federation, Federal Deposit Insurance Corporation

Private Debt funds have emerged to fill the gap left by the banks

Understanding the Capital Structure

Any investment in a business with real value is made using a combination of equity and debt.  One way to visualise a company is to think about the capital structure; of the total value, how much is financed by debt vs. equity. 

Note: For illustrative purposes only. Actual capital structures and returns will vary by deal.

Private debt funds therefore offer a lower risk, lower return than private equity but more stable returns with most funds paying income quarterly.

This is a big market, lending to big companies, managed by professionals

Globally, we estimate that there are 400 companies dedicated to making private loans to Mid-Market companies.  This is not a small industry.  Investment professionals are highly skilled and paid to understand the risks a company presents, model their cash flows and stress test the business.

Source: McKinsey Global Private markets Review 2018, Preqin Quarterly Update Private Debt, Q2 2018

Why invest in private debt?

1. Income Generating

Private debt offers an attractive income compared against most other forms of fixed income.  Income is typically paid quarterly. Note that the risk level of the investments shown below varies.

Note that risk level varies by investment type.

Source: Private Debt: Ares Management, European Unitranche and 2nd lien target yields, 2018; FTSE 100 Yield: Siblish Research, December 2017; Buy-to-Let: Property Partner, weighted average rental income yield; Corporate Bonds: Yield to Worst of Blackrock UK Corporate Bond Fund, August 2018

2. Consistent Performance

For over a decade, private debt funds have performed consistently, achieving stable, attractive returns. Note past performance is not indicative of future returns.

Source: Preqin Quarterly Private Debt Update Q2 2018. Performance is of all Private Debt funds, including North America and Europe

3. Security

Most Private Debt funds focus on managers that make senior secured loans. Having security over the assets of a company ensures that lenders should be protected in the event of a default and should receive some or all of their money back first.

4. High quality, large companies

Private Debt Funds lend to large, well-established and professionally managed companies. Most lenders will only lend to businesses typically with revenues of at least £50m, often in-excess of £100m.

5. Lending alongside Private Equity firms

Most Private Debt funds are making loans to companies being acquired by Private Equity firms. This generally ensures professional corporate governance and oversight, so that the business properly executes its growth plan.

What type of companies are being lent to?

Private Debt funds focus on lending to companies with the following characteristics:

Note: For illustrative purposes only. Actual company characteristics will vary by deal.

Your capital is at risk. The value of your investment may go up as well as down. You may lose all your invested capital. Investment made through Truffle Invest Ltd are not covered by the UK Financial Services Compensation Scheme (“FSCS”). Investing in Private Markets involves risks, including loss of capital (as outlined above), illiquidity, absence of control, lack of dividends and dilution, and should be done only as part of a diversified portfolio. Investments should only be made by investors who understand these risks and if in doubt should consult a fully qualified independent financial advisor. Tax treatment depends on individual circumstances and is subject to change in future.

Past performance is not a reliable indicator of future results. Target returns are not guaranteed and actual returns may vary significantly from target returns. We do not give advice or make investment recommendations to you. No communications through this website or any other medium should be construed as such. See Key Risks and Terms and Conditions for further information.

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