Can someone explain private credit/credit like I’m 5?
So I have been networking with some people and they say that credit/private credit can be a good exit opp after a few years of IB. I read the credit pages for KKR and Ares and I don’t really understand what they do. Do they provide private debt or are they investing in debt? Is there any difference between private credit and credit? I know these are dumb questions but I really need some clarification.
To keep it simple, as you requested, the private credit nomenclature encompasses a very broad array of differing strategies— everything from corporate direct lending to music royalties, from DIP financing to actively trading leveraged loans. At the most basic level, private credit, while an umbrella term used for lots of niche strategies as described above, usually means direct lending. These funds take the place of banks and lend money directly to companies. They provide a high degree of flexibility, speed, and specialization and in return usually get higher coupons. While direct lending can happen in any corner of the market, the most common is probably middle market sponsored companies with below investment grade credit ratings. The proceeds of the debt can be used for a variety of things, commonly M&A, refinancing, or recapitalization. Some funds just do this direct lending, while others can purchase debt on the secondary markets. I would suggest reading Stephen Nesbit’s Private Debt book if you are interested in the space (can probably find online for free). It’s a good overview of the space as an asset class.
Thank you so much! By any chance do you know which type of roles working private credit people seek out the most and pays the best? Looking at Ares website, the two main investment roles I see are direct lending and Credit. Are they extremely very different careers with different pay?
Ares Credit is split into Direct Lending, Alternative Credit, and Liquid Credit.
Commenting for future reference.
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Thanks for this thread. Really useful
Companies can get loans from banks.
Banks tend to be less flexible and more risk averse when lending which may frustrate some companies = a worse interest rate or asking for a lot of collaterals (assets that bank will take if you don't repay interest and principal) or imposing convenats (what you can do and you can't do = freedom diminished)
Companies go to investors and ask if they would want to lend them money.
Investors that lend money will dig deeper to understand the company and will lend money.
Investors that lend money also buy existing debt from other investors. You take the place of the previous lender for a lower price. The lower price is because the other investor 1) already receieved an interest, which reduces your total profit, and 2) you'll be the one exposed to default risk aka the company being unable to repay the loan. So basically is like you lend to the company from the beggining.
Banks also adhere to strict regulatory aspects that may limit the debt they lend, whcih again makes them less flexibile.
Private credit also can be a department within a company (a fund/GP) that does other sort of investments like for example private equity (buying companies). Private equity borrows money to pay maybe $100 for a company with $40 of their own money an $60 with borrowed money. Instead of going to banks to borrrow this money, the private equity department will ask their colleagues, the private credit department, to lend them money which is more advantageous because more people within the company will be analyzing the company and also the interest will be paid also to you indirectly (to your company) instead to a stranger (bank).
Bank says no loan for you.
Pool of big man money say loan for you but cost much money.
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