Private Credit Strategies Taxonomy
Private Debt strategy descriptions
Direct lending
Typically the most popular private credit strategy, direct lending funds provide loans to corporate borrowers as an alternative to the firm getting that loan from a bank.
Funds are characterized based on a range of factors that we provide filters for, including company size (LMM, MM, UMM), cap structure (senior, junior, unitranche), whether the loans are sponsored or non-sponsored, the regional focus and whether the fund is diversified or has a sector focus.
Distressed debt
These strategies either look to take full control (for control) or gain influence (non-control/restructuring) of companies that for whatever reason are operationally or financially distressed but are potentially good companies.
Sometimes branded as dislocation or rescue capital funds, they can offer loans to companies in distress or buy existing debt at big discounts that can be converted to equity through bankruptcy. As opposed to distressed debt hedge funds, the structure is usually closed-ended or evergreen with lock-ups of several years and can sometimes be structured as a trigger fund.
Mezzanine
Mezzanine debt funds provide a hybrid form of financing that sits between debt and equity. It is unsecured, subordinated to the senior debt and usually comes with higher interest rates and an option to convert the debt into equity. Lending is typically, but not always, provided to middle market companies.
Funds are characterized based on a range of factors that we provide filters for, including company size focus, whether the loans are sponsored or non-sponsored, regional focus and whether the fund is diversified or has a sector focus.
Opportunistic
These strategies have been gaining popularity with LPs as the fund has the flexibility to invest across the entire credit spectrum as opportunities present themselves. This includes private and public markets, the range of niche strategies that make up specialty finance and distressed and/or special situations investments. They can have a global focus or be targeted at specific regions.
Secondaries
These funds can be focused on LP-led or GP-led secondary transactions or a combination of the two. The former involves taking on LP stakes in other funds, while the latter involves investing in another GP’s continuation vehicle. By buying books of loans in the secondary market, LPs gain access to a more mature portfolio of assets, sometimes at significant discounts. They can have a global focus or be targeted at specific regions.
Special situations
These funds look to offer capital to stressed or better performing firms that are dealing with significant events, for instance, near-term financial stress caused by debt maturities, M&A or spin-offs, temporary disruptions to business models or supply chain issues. Special sits is less cyclical than distressed debt and managers have a wider set of opportunities outside of the highly specialised and narrower world of distressed investing. Special sits funds typically don’t look to take control of the firm, but can exert influence through board seats and other means. They can have a global focus or be targeted at specific regions.
Specialty finance
This category is made up of a range of niche strategies that fall outside the typical direct/corporate lending model. It includes asset-based lending funds, where loans are backed by specific assets, such as buildings, inventory or equipment; consumer & SME lending funds, lending to individuals or small businesses and often associated with online lending platforms; NAV Finance funds, which provide portfolio loans to private markets funds; Royalties funds, which buy up the rights to various assets such as music back catalogues or pharmaceutical intellectual property; Regulatory Capital Relief, where funds use derivatives to sell loan protection to banks; Litigation Finance, where managers help fund legal action and share in some of the potential returns; and Transportation finance , where funds buy up and then lease out aircraft, ships or other methods of transportation.
Structured credit
This strategy is made up of funds investing in less-liquid asset-backed investments, including private securitizations, and CLO tranches that are lower down the capital structure.
As opposed to structured credit hedge funds or traditional funds, these vehicles are typically closed ended or evergreen with a lock-up of several years.
Venture debt
These funds lend to start-ups that are looking to scale and need capital but perhaps don’t want to give away equity. The companies are typically backed by venture capital sponsors and the debt is senior, although it comes with a higher risk than a typical direct lending fund given the early-stage nature of the firm. Funds are often targeted at particular sectors, such as healthcare, and are usually regionally focused.
As opposed to multi-asset credit hedge funds, these vehicles are structured as closed end funds or evergreen funds with a lock up of several years.