Lesson 4 of 6 · All lessons in this module
  1. Private equity: buyouts, growth equity and PIPEs
  2. Venture capital and the corporate life cycleVideo lesson
  3. Private equity exits and risk-return
  4. Private debt: the main categoriesVideo lesson
  5. Risk and return of private debt
  6. Diversification benefits, vintage years and the risk-return ladder

Lesson 4 of 6 · 14 min

Private debt: the main categories

Private debt is lending by investors directly to companies, ranging from senior secured direct loans and unitranche facilities through mezzanine and venture debt to distressed and specialty lending, each matched to a stage of the life cycle.

In short

  • Growth since the 2008 crisis: tighter bank regulation left a gap that private lending funds filled.
  • Four main categories: direct lending, mezzanine loans, venture debt and distressed debt, plus unitranche and specialty loans. Access is direct (a loan to one company) or indirect (a fund).
  • Direct lending: senior, secured, covenant-protected loans from a few lenders on a fixed payment schedule; some lenders use leveraged loans (borrowing to lend) to boost returns.
  • Venture debt: lines of credit or term loans to start-ups so owners avoid dilution; may carry equity rights.
  • Mezzanine debt: subordinated to senior debt, usually unsecured, higher rate plus warrants or conversion rights; funds LBOs, recaps and acquisitions.
  • Distressed debt: buying debt of troubled mature companies, priced on expected recovery; includes DIP financing. Unitranche blends secured and unsecured debt at one rate.

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