Clubs, Covenants, Mezzanines, a Guide to Private Debt: QuickTake

Finance has seen many sea changes in the last decade, but in lending none larger than the explosive growth of what’s known variously as private debt, private credit, alternative lending or shadow banking. As traditional lenders stepped back from providing capital and central banks worked to keep the market music going, private firms have pooled money to issue ever-increasing amounts of debt, driving the sector’s total global assets to $812 billion in 2019. That rise has been welcomed by yield-hungry investors, eager to cash in on the asset class’s juicy returns, private equity firms looking to finance buyouts and borrowers who would struggle to drum up capital elsewhere. It’s also fueling anxiety among regulators worried that investors in the field, from mom-and-pop to big private equity firms, are taking on too much risk in their search for high yields. Here’s a guide to the main flavors.

The roots of business development companies, a type of closed-end investment firm, date back to a 1980 law meant to boost Main Street businesses deemed too small or risky for Wall Street banks. The law offered investors significant tax advantages that fueled comfortable dividends. Retail investors still make up a large swath of the equity holders for these types of private credit vehicles. But some of the players are anything but small. Ares Capital Corp., a behemoth BDC with $14 billion in assets, in late 2018 participated in a $792 million loan for the refinancing of Pathway Vet Alliance, a private equity-backed operator of veterinary hospitals. Total assets in BDCs jumped to $101 billion in 2018 from $23 billion in total assets in 2009, according to Deloitte LLP.