Private Equity vs. Private Credit

Hi Everyone,

Long-time lurker over here currently at a credit hedge fund focusing on special situations and opportunistic credit. Haven't seen all that much about private credit vs. private equity. Been trying to assess whether I'd like to stay on the credit side or move to the equity side. I like the creative side and uniqueness of the structuring around credit, but I have more of an entrepreneurial mindset and feel like I'd like the PE side of things. I'd love to hear people's take on private credit vs. private equity.

What hypes you up about credit/equity?

What's the comparative work life balance?

What's the comparative pay?

Which has the best future outlook?

Any other thoughts etc.

 

Comments (24)

 
  • Associate 1 in PE - Other
Oct 13, 2020 - 5:50pm

Happy to chime in and provide my thoughts on private credit as I've been in the space for a few years, but if you don't mind me asking why are you looking to switch out of a credit HF role? Seems as though opportunistic credit will be booming for the next 12-24 months and this is the best time to beat in a opportunistic credit seat

 
Oct 13, 2020 - 6:25pm

Thanks for taking the time. I'm not actually looking to get out. I find credit very interesting. I'm pretty fresh to the space and have a lot to learn. I'm mainly asking for some long-term perspective and insight from more experienced people. Like why do you personally like credit over equity or vice versa and what the pros and cons are

 
  • Associate 1 in PE - Other
Oct 18, 2020 - 11:00am

What hypes you up about credit/equity?

- Enjoy being on the credit side because you get to look at and close a lot more transactions - while credit is now much more commoditized than what it used to be, still far fewer private credit firms that can Agent deals relative to PE funds out there. You dig deep into new opps, but not to the extent a PE Sponsor would given you're sitting ahead of them in the cap stack. My firm invests cross capital structure too so get to see deals across senior 1L, 2L, uni, mezz, equity, etc.

What's the comparative work life balance?

- Currently working about ~70 hours a week, but normally I'd say anywhere between 55-90 - pretty wide depending on deal flow and where your respective deals

What's the comparative pay?

- About $175k-$250k for a first year associate depending on the size of your shop and whether they recruit former bankers vs nontraditional backgrounds

Which has the best future outlook?

- I'm inherently biased here, but I would think private credit given LP's are recognizing that rather than getting a 15%-20% IRR in an average buyout fund, they could be getting 10-12% in a levered credit fund and even more in funds that do slightly hairier deals that command a higher yield. Plus with private credit LPs are getting consistent cash pay on a quarterly basis while in PE your $ are locked up for quite some time 

Any other thoughts etc.

- Overall big fan of private credit and think it will explode over the next 5-10 years, but at the end of the day most private credit firms that do Sponsor backed deals will be at the mercy of PE deal flow as both go hand in hand

 
Oct 18, 2020 - 9:18pm

Great response! Hypothetically, if you were to one day want to switch to PE, do you think you will have been pidgeonholed and labeled as a "credit person" or do you think it is more doable than people think? I tend to not fully believe in the golden path of you have to do IB or something of the likes to get into the space. I like to think its more so your skillset and personality. I also feel like credit gives you exposure to a lot of different and nontraditionally unique perspectives and analyses that would actually be valuable at a PE firm. I'd love to hear your thoughts on the ability to lateral later on. Not asking in the sense that the end goal is PE; more so if you got bored or thought PE would be more exciting for whatever reason. 

 
  • Associate 1 in PE - Other
Nov 6, 2020 - 8:13pm

Credit definitely pigeonholes you to an extent, but the skills you learn in looking at the business from a credit investor perspective, structuring deals, understanding cash flow financing, legal aspect of credit documentation, etc. is highly valued in PE as well. Credit investors usually stick in credit because they prefer credit over equity and the other way around equity investors prefer equity over credit. They really are two different mindsets, but if you are early in your career it is easier to move around. 

 
Nov 6, 2020 - 11:46am

Not in the space, nor really looking at moving to private credit but thought I would pick your brain.

Do you not think that overall costs to deploy $ is higher in PC vs PE, given that after 1 year any good PE investment would refi or take out their 2L. This will obviously impact comp, and the amounts of deals needed to deploy capital no? 

 
  • Associate 1 in PE - Other
Nov 6, 2020 - 8:09pm

1. 102/101 prepayment fee in Y1 and Y2 disincentives a refi. 

2. If you want a capital structure to support growth especially through tuck-ins / add-on acquisitions you'd want a bifurcated Senior / junior debt structure in order to squeeze out as much leverage you can

3. An average MM PE firm closes max 4-6 deals a year. A MM private credit firms closes 40-60 deals a year through a combination of new platforms and add-on acquisitions. You get to look at a lot more deals because you could have the same exact deal in with 5 private equity Sponsor's so much better odds of leading or participating in that deal.

4. Every private credit firm has their niche on where they like to operate ex. BMO, Twinbrook, Madison like high quality businesses and are doing more vanilla deals while your Comvest Credit, Whitehorse, Summit, Blackrock's of the world are doing much hairier deals commanding higher yields oftentimes with warrants. The way you structure a deal (ex. L + 9.50% second-lien facility with $3 million equity co-invest) can yield you an IRR in the mid-teens inclusive of all fees and if the fund is levered.

 
  • Analyst 2 in IB - Gen
Dec 1, 2020 - 4:02pm

Side question - have you seen many people exiting to private credit from IB credit risk roles? Have exposure to modelling , legal docs, structuring etc. but tend to be led by FO / Banking for the first two (i.e. I review the model and assumptions and opine on legal matters).

 
Most Helpful
  • Analyst 2 in IB - Gen
Oct 14, 2020 - 3:59pm

Just a few generalized thoughts (I recruited both PE and PC):

PE: Focus on equity (Growth, Buyout, etc), Deeper analysis in fewer companies, Few new transactions each year with good amounts of PortCo work, Financial engineering and/or operational improvements to create IRR, Lifestyle comparable to banking early on but gets better, Very good pay with Carry, Career Move or opportunities include: B School, Other PE, HF, or finance roles, Industry or start-up move, etc. 

 

PC: Focus on various types of credit (1L, Senior Stretch, Unitranche and/or 2L, PIK, Warrants), Less deep analysis focusing on credit story but look at numerous companies, Several new transactions each year with some work on existing investments, Principal payback and Interest coverage to create IRR, Lifestyle much better (8:30am-8:30pm with some weekend work), Very good pay (generally a little less than PE) with less volatile Carry, More a career move or opportunities include: Credit HF, other debt strategies, maybe PE or industry if you want. 

 

PE and PC are kind of like Yin and Yang, won't exist without the other and are complementary. Though, very different mindsets and strategies. Both great careers. 

 
  • Analyst 1 in IB - Gen
Oct 15, 2020 - 10:32am

What exactly does the career progression in private credit look like and does the skillset transfer well to non-finance opportunities (as PE might do after working with portcos)?

 
  • Analyst 1 in IB - Ind
Dec 1, 2020 - 3:55pm

I have a question on what you mean by "less deep analysis focusing on credit story." Wouldn't private credit investors do a deeper analysis compared to PE? Since they are looking at the downside risk? Maybe I am thinking about this wrong.

 
Nov 5, 2020 - 10:32pm

At the end of the day, in private credit you are underwriting a downside, structuring to mitigate disaster in said downside, relying on management and ownership to provide you information you require or request, and monitoring your coverage from a collateral or enterprise value perspective. For LPs, you get consistent income but at income tax rates.

In private equity, you are underwriting an upside, structuring to maximize returns for future fundraising, focusing more time than you'd think wondering if you have the right management team, hiring new leadership if need be, structuring incentive plans and compensation packages, running parallel models to your management teams and questioning every number they give you. From an LP perspective, you see lumpier distributions but get capital gains treatment on taxes.

Which sounds more like what you want to do? You can make plenty of money in either asset class.

-- sm
  • 3
 
Nov 6, 2020 - 11:32am

I wouldn't focus on the "sexiness" of any particular industry. The only person you should worry about impressing is yourself. Your friends and family members don't go to work every day and do your job for you. So if you are chasing a career path for adulation and glory, you may be doing it at your own expense. A sexy career comes from a job that (a) you genuinely enjoy, (b) constantly challenges you, and (c) provides you with a sense of accomplishment and value. As an investor, you will likely get a heap of B, so you want to make sure A and C are covered. That's were the decision between thinking like an owner or a lender comes into play. Hope this is helpful.

-- sm
  • 2
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