Private Debt: Alternative Corporate Financing and a Growing Asset Class

Private debt refers to the provision of debt capital to companies by private lenders such as funds or institutional investors, outside the public capital markets. As a stand-alone asset class, private debt offers companies alternative financing options and gives investors access to a segment that was long reserved for institutional players. As this credit market continues to open up, affluent private investors are also looking at private debt as a portfolio complement.

The most important facts in brief

• Private debt is a growing asset class outside the public capital markets.
• Private debt can spread a portfolio more broadly. The price is that capital is usually tied up for several years, and defaults are possible.
• The private debt market grew by an average of 13.5 percent per year over the past decade (source: Preqin, cited in McKinsey Global Private Markets Report 2024).
• A study by Lucerne University of Applied Sciences and Arts (2019) estimated the Swiss market volume at around three billion Swiss francs.

What is private debt? Definition and explanation

Private debt refers to loans that companies obtain outside the stock exchange and mostly outside the banking system, for example from private debt funds, insurers or pension funds. In traditional debt financing, by contrast, companies issue bonds on the capital market or take out a bank loan. Private debt has gained in importance in recent years and is used by institutional investors and, increasingly, by affluent private investors.

Compared to traditional bank loans, private debt often offers more flexible terms and tailored loan arrangements. Companies use it when a bank will not lend to them, or not enough, or when they want financing that is faster and more flexible.

For investors, private debt can be a way to diversify their portfolios.

How does private debt differ from other financial instruments?

The main differences from common investment products:

• Public bonds: Unlike public bonds issued by companies or government institutions on public markets, private debt consists of claims that are not publicly traded. The lenders, mostly funds, grant loans directly to companies and receive contractually agreed interest in return, and in the case of mezzanine sometimes a share in profits.
• Equities: Private debt contrasts with equities, which represent ownership interests in a company. While equity holders benefit from price gains and dividend payments, lenders receive contractually agreed fixed or variable interest payments and normally no company shares.
• Private equity: Private debt also differs from private equity, in which investors provide equity capital to companies. Private debt funds, by contrast, provide debt financing and are creditors of the company. They have priority over equity investors in the event of insolvency or restructuring.

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How has the global private debt market developed?

Over the past decade, the private debt market has grown strongly. Private debt gives growing companies financing and gives investors a possible interest premium over public debt instruments, in exchange for credit and illiquidity risk. Private debt originally counted as a subcategory of private equity, because it often co-finances leveraged buyouts, i.e. debt-financed company acquisitions. Today it is mostly treated as an asset class in its own right.

On average over the past decade, the private debt market grew by 13.5 percent per year (source: Preqin, cited in McKinsey Global Private Markets Report 2024). By comparison, private equity and venture capital grew by 11.5 percent per year over the same period, and real estate by 9.1 percent per year.

Private debt: market size in Switzerland

There are hardly any reliable figures for Switzerland, because the market is not public and statistics are mostly based on estimates. Lucerne University of Applied Sciences and Arts examined corporate financing with private debt in a 2019 study and estimated the Swiss market volume at around three billion Swiss francs. We are not aware of a more recent publicly available estimate.

How is private debt opening up to private investors?

For many years, private debt was reserved almost exclusively for institutional investors. In recent years, the private market for corporate loans has become increasingly accessible to a broader circle of investors. Some of them use private debt as a complement alongside equities and bonds.

For private investors, the route into this asset class usually runs through funds, and in Switzerland many of these are open only to qualified investors. At Everon, access to Private Markets, and with it to private debt, comes through a discretionary mandate. Under Art. 10 para. 3ter of the Collective Investment Schemes Act (CISA), retail clients who have a long-term asset management relationship with a supervised financial intermediary such as Everon count as qualified investors, unless they have declared that they do not wish to be treated as such. Everon’s portfolio management team decides whether, and to what extent, private debt funds are included in the portfolio, within the agreed investment strategy.

Capital invested in private debt is tied up for the life of the funds, often several years, and is not available at short notice. This calls for a long-term investment horizon. Assessing an individual exposure requires expertise, because the borrower’s creditworthiness cannot be checked from public sources. Private debt can at times perform differently from listed securities such as equities or bonds. A different performance pattern does not protect against losses. Borrowers can default, and because valuations are updated less often than prices on an exchange, changes in value show up with a delay.

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What opportunities does private debt offer investors?

The basic principle of private debt is that private lenders bear the financing risk and can receive an interest premium over comparable listed bonds as compensation for credit and illiquidity risk. The actual returns achievable depend on the chosen strategy, borrower quality and market conditions; they are not guaranteed. Past returns are not a reliable indicator of future results.

Alongside the diversification that alternative asset classes can offer, private debt has some features of its own:

• Seniority in the capital structure: Compared to private equity and real estate, debt instruments rank higher in the capital structure. In the event of a default, creditors’ claims rank ahead of those of equity holders. How much is recovered depends on ranking and collateral.
• Contractual interest payments: Interest is contractually agreed and is therefore usually easier to plan for than returns on equity investments. With variable rates it fluctuates, and whether it is paid in full depends on the borrower’s creditworthiness.
• Close relationship with borrowers: Private lenders typically maintain closer relationships with their borrowers than is usual with standard loans. Depending on the contract, they receive ongoing information and can react earlier through covenants if the company’s situation worsens. This does not protect against losses.
• Access to specialised sectors: Private debt gives investors access to areas such as renewable energy, growth-stage companies and financing forms otherwise primarily reserved for banks.

What risks should investors watch out for in private debt?

Private debt investments carry specific risks, up to and including the loss of the invested capital. Investors should carefully assess their risk capacity before investing in this asset class.

The main risks:

• Illiquidity: Private debt investments are often long-term exposures with limited liquidity. Unlike publicly traded securities, an investment often cannot be sold early, or only at a discount, because the secondary market for private debt is small.
• Credit risk: Private debt investments carry the risk that the borrower will be unable to meet its obligations. Causes include weak earnings, high debt or a downturn in the borrower’s industry. How much is recovered in a default depends on the seniority of the debt instruments (senior or subordinate) and on collateral.
• Concentration: Private debt investments can be concentrated in specific companies, sectors or regions. This increases risk, as negative performance in one company or sector can have a significant impact on the overall investment.
• Lack of information: Because private loans are not listed, the disclosure rules for listed securities do not apply to them. Investors therefore often receive less information about the borrower and the terms of the loan. How thoroughly a borrower is vetted depends heavily on the fund manager.
• Interest rate risk: Many private debt loans are tied to variable interest rates, often with an interest rate floor. When interest rates rise, investors receive higher interest payments. At the same time, the loan becomes more expensive for the borrower, and the default risk may rise. When interest rates fall, interest income declines until the floor applies.
• Costs: Private debt funds charge management fees and in some cases performance fees; funds of funds add a second layer of fees. See also What Private Markets Funds Really Cost.

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Why does private debt require professional expertise?

Private debt is a complex asset class. Private investors therefore generally invest through funds whose managers vet the borrowers.

Credit analysis

Fund managers usually receive ongoing financial figures and reports on business performance from borrowers. From these they assess credit risk and repayment capacity and negotiate the loan agreements. Economic influences such as inflation, the economic cycle and the interest rate level feed into this assessment.

Diversification and fund selection

Running a private debt portfolio includes managing risk and spreading the portfolio across borrowers, industries, geographies and instruments, such as senior secured loans or mezzanine capital. At Everon, the portfolio management team reviews the funds and their managers and, on that basis, selects which ones are included in a portfolio.

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What investment strategies and financing instruments exist in private debt?

Private debt is mostly invested in through private debt funds. These funds differ in their strategy and in the debt instruments they hold.

The financial instruments fall mainly into the following categories:

• Loans with senior collateralisation (Senior Secured Loans)
• Subordinated or unsecured loans (Junior Loans, Unsecured Loans)
• Mezzanine instruments (ranking behind the senior loans)

Combinations of the various instruments are also possible.

Direct lending

In this form of financing, specialised private debt funds grant loans directly to companies, without bank syndication. Direct lending funds can structure loans quickly and flexibly. They can, for example, defer interest payments for a certain period or add them to the principal, and tailor the loan terms to the borrower. In return they often charge higher interest than banks, partly because they bear more risk.

Distressed debt

Distressed debt generally refers to bonds or loans of companies that are in financial difficulties. They may be facing insolvency or may already be insolvent. This debt often trades below face value as investors account for the elevated risk and repayment uncertainty.

With distressed debt, investors acquire claims against companies in a difficult phase. Whether a company recovers is uncertain, and part or all of the capital may be lost.

Mezzanine capital

Mezzanine capital is a form of financing that combines characteristics of equity and debt. It ranks behind senior debt and ahead of equity in the capital structure.

Mezzanine capital is typically used to supplement a company’s equity, for example in acquisitions, growth investments or restructurings. It can also be used when traditional bank loans are unavailable or insufficient.

Compared to senior loans, mezzanine capital usually carries a higher interest rate but also a higher risk, because in the event of insolvency it is repaid only after those loans. Mezzanine providers often have the right to share in company profits or to convert their claims into equity at a later date.

Private debt fund of funds

A private debt fund of funds invests in several private debt funds and thereby spreads the investment more broadly. This adds a second layer of fees.

Special situations

Private debt funds specialising in so-called “special situations” provide capital for particular financing situations.

Typical situations are restructurings, carve-outs, or loans that banks and conventional credit funds cannot structure suitably.

Venture debt

Venture debt refers to a specific form of financing in which growth companies or start-ups raise additional debt capital to support their growth. Unlike conventional debt financing, venture debt is specifically targeted at companies in an early or growth stage, typically backed by venture capital investors. Because many of these companies do not yet generate stable earnings, the default risk is elevated.

Frequently asked questions about private debt

What is private debt? Private debt refers to the provision of debt capital to companies by private lenders such as funds or institutional investors, outside the public capital markets. Unlike listed bonds, private debt arrangements are agreed directly between lender and borrower, often with flexible terms and variable interest rates.

What types of private debt are there? The main strategies are direct lending (loans without bank syndication), mezzanine capital (a hybrid of equity and debt), distressed debt (investments in financially distressed companies), special situations (particular financing situations) and venture debt (growth financing for start-ups).

What are the risks of private debt? The main risks are illiquidity (no easy resale), credit risk (borrower default), concentration risk (few positions), limited transparency and interest rate risk with variable-rate exposures. Private debt generally ties up capital for several years and cannot be sold at short notice.

How large is the private debt market in Switzerland? The Swiss private debt market is a non-public market for which reliable statistics are difficult to access. A study by Lucerne University of Applied Sciences and Arts in 2019 estimated the Swiss market volume at around three billion Swiss francs. We are not aware of a more recent survey.

What does a private debt exposure require of private investors? Capital is generally tied up for several years, there is hardly any secondary market for an early exit, and the borrower’s creditworthiness cannot be checked from public sources. Private investors therefore mostly invest through funds whose managers vet the borrowers.