Private Debt/Direct Lending Exit Opps?

Where do the majority of direct lending/mezz investment professionals go following their stint at their respective firms? Can they go to credit hedge funds or distressed debt funds? If anyone has any firsthand experience or know of others who have made the jump would love to hear

 

This question comes up often. The answer is always a version of: more difficult than you'd think, but not impossible.

The technical knowledge required to shift from debt to equity can be learned quickly and easily. But there's a big philosophical difference between debt and equity investing. One is risk-averse, the other risk-seeking. The longer you're in direct lending, the more of a challenge it is to convince a PE firm you've got the right makeup to do equity investing.

 
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Couple of reasons. Most obvious is that in direct lending you're lending investor money in co-mingled funds or separately managed accounts which carry a traditional PE-type fee structure (i.e. 2 & 20), whereas commercial bank lending is lending off of a Company's balance sheet.

Second is the type of transactions. Direct lending deals are ones that would not be done by a bank given where they sit on the risk curve. If you think about the players who would take down an LBO financing arranged by a LevFin (sell-side) team at an IB, the banks could / would hold the least risky pro-rata pieces of paper while the "riskier" paper (2nd lien, HY bonds, etc) would be sold to buy-side investors. While it's all lending to the same company, there are obviously different risk / return characteristics of where the commercial lenders are playing and where the "buy-side" investors are playing.

 

As alluded in the first comment, most private debt professionals stay in the space and moves are mostly fixated around jumping to a ‘higher caliber’ shop than switching to the equity side via PE or HF. Most big direct lenders (debt arms of large PE shops) pay exactly the same as what you expect in PE, and in my experience, mobility and upside is much greater and lifestyle is slightly better. I would say most people are aware of this when they jump into debt-land post-banking, so the sample size of “exit ops” out of direct lending is very limited to begin with as most people tend to stay given they had no intention of becoming an equity investor when they made that original switch. I’ve actually seen the opposite transition more in recent years - i.e. 2 years of post-banking PE to private debt, especially from MM PE to MF credit.

 

Sorry to revive, how common is it to switch from MM DL to MF DL?

 

Mobility makes sense but how is upside higher? I would think at the very top and all depends on your ability to raise funds and win new deals.

 

That’s on the capital market side of PE. Indeed a sweet gig. They just get a term sheet from one lender and ask all lenders to put their best foot forward. They’re usually ex originators on the DL side.

 

Does anyone have any color to add on the jump from direct lending to a HF that invests in credit related products? Disregarding the change in lifestyle, demand, hours change. Wondering if people have done this in the past.

 

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