Private Credit and Private Equity
Rookie mistake today. I am a first yr at M7 MBA. Was speaking with an alum in private credit. Asked him, why he chose to go into PC. Said finds debt's focus on downside protection appealing, which as per him means developing a more through understanding of the lending / debt documents. I remarked how's that different from PE where as an equity investor you also need to understand your limitations (and potential flexibility) imposed by the lending documents in case portco performance gets hits by a black swan event or a series of them. I dont think my observation is unique, but he started rambling bla bla.. Couldn't figure out what he was saying. So wanted to come to WSO and ask why would someone want to work in private credit (say direct lending) as opposed to PE? The only reason why I see it is because in PC, you have more variety (and thus different risk profiles) in terms of where you can invest: sponsored; non-sponsored credits. And building on that, you can also potentially underwrite and evaluate more opportunities (cast a wide-net) as hurdles targeted by Private Credit can be broad depending upon where in the cap structure you're coming. Not sure what's the appeal of doing something very specific like direct lending.
I am not sure I understand the focus on downside protection (that PC professionals spit) because even equity guys want to minimize / focus on downside protection, otherwise they are shit PE investors. So what am I missing here in terms of why private credit is attractive vs. PE?
PS - let's keep comp aside, because nobody states those reasons in an interview
The hours are better in private credit.
You aren’t getting the job. Come up with your own opinion on that question, not appropriate for an interview.
Debt investors are cynics and equity investors are optimists. Everything else is noise.
Very well put!
OP: I’d like to touch on another aspect : the downside protection story is valid as the biggest upside in credit is maximal downside protection! Imagine for banks who hold TLAs and some portion of Unitranche on their BS; there’s literally no upside if the company produces best in class q-o-q results or if the stock price touches new highs. We are only interested in getting our payments. You could argue that from a credit fund perspective (as they’d invest further down in the cap stack - preferred, mezzanine, etc.) there’s some upside participation in case of good performance - i.e convertibility to equity or likewise instruments (warrants for example).
The rest of the points you mention above are all valid reasons as well :) You could add that in PC, you’d probably work on more deals during your tenure relative to PE!
I am just an intern but I found the extremely long timelines (literally like 8-10 months of diligence) of a PE deal off putting, specially when we fail to execute for some idiotic reason
At least before the current crisis PC was the trending area. PE is mature and saturated like shit, many funds will struggle, PC was growing insanely. Let’s see how that develops. Hours usually better, comp on junior level very similar and you see more deals, what I truly enjoy as a junior. Connected to that, in PC you work more on deals an have less portfolio company work, which besides some funds that really do interesting portfolio work is quite boring to me.
Asking someone in private credit why those chose PC over PE is like asking someone who went to Cornell/Tufts why they chose to go there over Harvard. The explanation you get will be in like form.
Sure maybe there’s 1 or 2 stray dogs who turned down Harvard to go to Tufts, but the vast majority went to the best school they could get into. Similarly, you’ll be hard pressed to find someone who turned down a job at CD&R to go work at Golub or HPS, let’s be serious.
I’d go as far to say as asking someone in PC that question is a bit of a dick move. It’s like asking them why they chose to marry a fat chick instead of a model.
Some of the most impressive people I know elected to pursue PC over PE. To say that PE is by default better or “more prestigious” than PC is simply inaccurate. They are two different asset classes and have two different investing mindsets. For some people, PE is more aligned with their personalities/personal strategy. For others, PC is more aligned. The implication that everyone wants PE and it’s only those who can’t make it there turn to PC may have been true 15 years ago, but it’s certainly not the case now. Much of PC has been crushing it in the past few years, specifically the distressed/special situations groups. The most impressive candidates are no longer defaulting to PE. As others have said as well, there is room for PC to grow significantly, but definitely not as much for PE (I wouldn’t say PE is saturated, but growth has decelerated quite a bit in the past decade)
Only sad, sad, sad people view life that hierarchically and that’s coming from someone who joined PE out of undergrad from one of HYP.
I know some brilliant people who opted for worse schools for more money or better programs. I know some really good looking guys who chose less attractive women because they were done with the dumb hot bimbos. Don’t know anyone who chose PC or PE yet, but I have zero doubt they’re out there.
Lol clown move when you realize that private credit returns this cycle will be vastly superior to those current equity vintages. Have fun with your cost of equity you underwrote now being equal to your cost of debt (before libor goes to 6).
Private credit offers a far superior risk adjusted return vs most of the over saturated equity plays of selling assets to each other
ETFs also offer a great risk adjusted return, go work at Blackrock pedaling SPY.
People are in this career to make a ton of money. When they try to play for the Yankees and end up playing minor league ball is Latvia… they suddenly redefine the game to some intellectual pursuit as if they’re academics.
You make more money in PE. If you refute that you’re clueless. You can’t spend “risk adjusted” dollars. You spend real dollars. And no one knows gives you a higher exchange rate because you worked smarter not harder to get that dollar.
I chose PC over two PE offers, both of which had slightly higher pay. The asset class is growing like nobody's business, the approach to investments is thoughtful and differentiated from PE with a focus on downside protection and structuring your way around risk, you don't have to get as in-the-weeds (think: sitting there with the Treasurer of some portco going over invoices to try and make sense of their financials), you don't have to throw a ton of time into taking care of an under-performing portco more generally, the work-life balance is incredible (often leave work at 6pm), if one sponsor loses a bid you can still participate in the deal via another sponsor which means much more of what you start working on actually gets to the finish line than in PE, and you see a ton more deals than at a PE fund so you get to think about and evaluate more companies and get more reps faster.
PE is also very interesting and exciting and I could list of a set of reasons to do that over PC just as long as the list above - but the point I'm making is that it's not clear cut. There are reasons to choose one over the other that aren't just power-ranking based on some arbitrary clout scale.
Sometimes PC can just be a better risk-adjusted return than PE. Yes PE may get higher headline return numbers for the funds you hear about, but there’s survivorship bias to that. Not everyone in PE puts up Apollo PE numbers and even those numbers are never guaranteed. PC, especially given market dynamics may just be a better risk-adjusted return for someone given their skillset/opportunity set in front of them. I hope that helps
A sneaky benefit of PC imo is you generally don’t really need to travel that much. One of the benefits of being less involved in portco ops, unless something goes poorly or you’re working on a more involved non-sponsor situation. Obviously fund/group dependent, but has been the case in my experience. Some people like traveling for work though, I just don’t. To each their own.
PE is definitely perceived as more “prestigious” if that’s what you’re trying to maximize, nothing wrong with that. Could probably make a good case that “prestige” is correlated to higher compensation (not always the case though), so not necessarily bad. But if you have normal friends/family outside of finance/NYC you’ll probably realize almost no one cares about prestige or even really understands it in the finance sense.
Do whatever interests you/you like better. If you don’t know, talk to people in the space and educate yourself. Get a job doing one of them. If you’re a rockstar, you can switch at jr level (with some effort).
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