Private Equity vs Private Credit

More of an open ended discussion, what are the differences in looking at a company from an equity perspective vs a credit perspective?

Why do individuals look to go into equity rather than credit or credit rather than equity? What types of professionals best fit each category?

Are they both equally competitive industries and/or good career starters vs a traditional investment banking route?

Comments (5)

Jul 10, 2018 - 3:29pm

and0ne101, pure crickets, that's where I come in. Any of these useful?

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  • European Private Equity Associates backgrounds the list on AskIvy, which has PE firms with offices in London with AUM 500+mil. 101 of 162 associates ... 1 from Stanford. Which fields did they move to PE from: 72/101 in London were involved with IBD 12/101 in ... can still land you in Private Equity down the line. What I saw though, was that usually you need more ...
  • Investment Banking to Private Equity- 6 Things You Should Know content from 2016, this one ranks #47 with 25 silver bananas. IBD PE PE Recruiting private equity banking ... are drastically fewer spots in PE than in IB. The cycles is which firms recruit isn't as ... 1. Why not just try to start with a PE firm? There are PE firms that hire juniors out of ...
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  • More suggestions...

If we're lucky, maybe I can guilt some users to help you out: nicholasc20 CuddleBunnies BlueNeon

You're welcome.

Most Helpful
Jul 15, 2018 - 11:33pm

There are two main things to think about when broadly differentiating a private credit vs equity investment:

1) Cap Stack/Seniority: In the cap stack, credit (even subordinated) always sits above equity. This means that if the issuer or debtor enters financial distress or bankruptcy, a credit investor (creditor) will have first claim to assets and likely receive more of their money back.

2) Upside/Downside Mitigation: However, creditors generally do not get exposure to upside. In public credit markets; you could purchase a bond that was undervalued (higher yielding than it should); the bond will converge towards its true value, and you will have principal appreciation. Private credit tends not to trade once it's been syndicated, so you end up holding it until maturity.

Thus, the general best case for a private credit investor is simply to get paid back on the agreed upon terms. If the issuer has a breakout year and lands a huge contract and slashes costs by 20%, you won't see a nickel of it. On the converse, if the company has a horrible year; they still will prioritize their debt obligations to avoid bankruptcy or restructuring.

Now, if you think about this theoretically, you'll come to the conclusion that highly distressed credit, or highly subordinated credit, begins to look like equity when you go far enough down the cap stack. This is 100% correct - mezz, sub or distressed debt has higher yields because in theory, the likelihood of a creditor being paid back is much more dependent on the performance of the company; because in bankruptcy the senior secured lenders above you will have taken the best assets already.

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