- Date
- 17 June 2024
Full Disclosure:
What I found out about private credit
By Jaysen Sutton |
Hi Reader šš½,
Okay - I have been hearing this term a lot. āPrivate creditā. Let me explain:
Normally, when a company needs to borrow money, it might go to a bank for a loan. If a company needs a lot of money, a group of banks might join up together to lend money. Thatās what we call a syndicated loan. Alternatively, if the company is big enough, it might be able to issue a bond in the public markets. Thatās a bit like a crowdfunded loan - investors can buy the bond, give the company a bit of money, and the company promises to pay it back after a period of time with interest.
So whatās private credit? Well sometimes you go to a bank and the bank doesnāt want to lend to you. Youāre too risky, and the bank has tightened its riskier lending since the financial crash thanks to stricter regulations. Youāre also a bit too small to go issue a bond in the public markets.
But then this third party comes in and theyāre like, āIāll give you a loan!ā. Who is it? Itās not a bank. Itās a private equity firm. I thought private equity firms buy companies? Well yes, but they also now lend.
So a private equity firm uses its money to lend you money? Well not exactly. Whatās interesting is the investors in this case are the typical investors to a private equity firm. Think of the institutional investors like pension funds and insurance companies. So private credit is an asset class - itās something investors can allocate their money to, and private credit promises a return that beats the market.
What private credit promises over traditional debt is a faster way to raise money. Itās less regulated, itās flexible, youāre dealing with one just one fund with experience in your market, and they can make quick decisions.
A lot of money has recently poured into private credit. But what's the fear? It's less regulated. The lenders range from PE firms to any non-bank lender. Some have called it a bubble. And there are worries over more defaults thanks to the floating interest rate on the loans (which matches the rate of interest in the economy).
What does this mean for law firms?
Many of the big transactional law firms you see in London have developed private credit practices. They have also laterally hired into this space. This includes Latham, Paul Hastings, Simpson Thacher, Akin Gump, and Goodwin.
The biggest players in this space include Kirkland and Paul Weiss. Last year, Kirkland advised on the biggest ever private credit deal in the US.
Have any thoughts? I'd love to hear your perspective below!
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