What is private debt?

Private debt includes any debt held by or extended to privately held companies. It comes in many forms, but most commonly involves non-bank institutions making loans to private companies or buying those loans on the secondary market. 

A variety of investors, or private debt funds, are involved in the space. They include direct lend, distressed debt, mezzanine, real estate, infrastructure and special situations funds, among others. In addition to paying back the full sum of the loan in the future, the company must also pay interest to the lending institution. 

Private debt funds come in different shapes and sizes. For example, some private debt funds provide capital to sponsor-backed borrowers, others fund real estate development projects, and some invest entirely in the debt of distressed companies.

The prevalence of private debt

Private debt accounts for a substantial piece of the private markets—10%-15% of total assets under management (AUM). In fact, most private middle market companies have at least some debt. Investor demand for debt funds is on the rise. Depending on interest rates, regulations, business cycles and other factors, investors may view private debt as a lower-risk approach to private equity or the diversification of their assets.

Growth of private debt in recent years

When regulations were put on banks after the Global Financial Crisis, a new lending market was created for non-bank entities. With high-yielding opportunities in public markets being few and far between, investors explored new strategies. Private debt funds, serving as direct lenders to middle-market companies and sources of credit for leveraged buyouts, promised to provide the higher yield that investors wanted.

But fundraising totaled more than $60 billion in 2007 and 2008, indicating that there was plenty of interest in private debt vehicles even before the crash. In fact, industry titans like Apollo and Oaktree have been raising private debt vehicles since the 1990s. However, the industry was less developed and more concentrated in the years leading up to the crisis, only gaining widespread recognition in the last decade.

Milestones in the post-global financial crisis regulatory environment—including the Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel III and the US’ Guidance on Leveraged Lending—cultivated demand for financing opportunities from non-bank lenders.

Private debt in the COVID-19 era

The number of new private debt funds plummeted to a nine-year low in 2020, while the amount of new capital raised dropped to its lowest point in five years—but that’s not the complete picture. While some investors were wary of the market chaos caused by COVID-19, others were already well-stocked after a glut of major funds in recent years. The pandemic inspired a wave of distressed debt and special situations funds from investors eager to capitalize on new opportunities, and private debt was primed to bounce back in 2021.

Fast forward to Q3 2021, and the private debt environment remains buoyant after COVID-19 setbacks. Although private debt fundraising declined worldwide during the height of the pandemic, the rebound in 2021 has been swift thanks to:

  • A surging economy
  • Liquidity in the credit markets
  • Businesses avoiding default

How PitchBook categorizes private debt

PitchBook takes a hybrid approach to private debt fund categorization, considering seniority in the capital structure, risk/return profile and industry exposure.

Related types of private debt

The private debt sub-strategies below are in ascending order of relative risk/return characteristics:

Direct lending

Senior loans made to mid-market companies without an intermediary. May include revolving credit lines and second lien loans. Unitranche facilities, which combine different debt instruments under a single umbrella, are also becoming more common.

Distressed debt

Differs from special situations in that it generally involves the purchase of securities in the secondary market, rather than new origination of debt or structured equity.

Infrastructure debt

Debt used for infrastructure development and investment in existing assets, generally with longer terms (30+ years) because of the extended useful life of the assets.

Mezzanine debt

Subordinated debt, generally with features like preferred equity, like warrants—which increase the value of the debt. Mezzanine debt is often used in leveraged buyouts (LBOs).

Real estate debt

The most common real estate debt strategy is direct lending for real estate acquisitions. This may include the buying and selling of securitized real estate loans in the secondary market. Risk profiles vary based on the underlying assets.

Special situations

Debt or structured equity investments made with the intent of gaining control of a company; generally, one in financial distress. Special situations can include trading in the secondary market, direct origination or distressed debt where the manager believes price dislocation is present.

Venture debt

Debt financing extended to companies with venture capital backing. For entrepreneurs, venture debt—also called venture lending—serves to extend the runway to exit without further diluting ownership. Venture debt is a type of short- to medium-term debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund growth and capital expenses.

More on private debt

What are the most active lenders to US PE-backed companies in 2021?
Read our blog post about the firms leading the private debt market

Learn about how the post-global financial crisis regulatory environment created demand for non-bank lenders
Check out our blog post about shifts in private debt since the Great Recession

The ins and outs of direct lending
Read our Q&A with PitchBook’s Dylan Cox, Head of Private Market Research

The private debt environment remains buoyant after COVID-19 setbacks
Download PitchBook’s H1 2021 Global Private Debt Report

Learn about venture debt, its benefits and its future
Watch our video about the emergence of growth equity and venture debt

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