Private Debt: Alternative Corporate Financing and a Growing Asset Class

Private debt refers to the provision of debt capital to companies by non-public institutions or 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, a growing number of private investors are assessing private debt as a portfolio complement.

The asset class resonates with many investors seeking to further diversify their portfolios. In this article, you will get an overview of private debt, what added value it offers and how it differs from other investment classes. Different types of private debt are explained, as are the risks that need to be considered.

The most important facts in brief

• Private debt is a growing asset class outside the public capital markets.
• Corporate financing as a private market investment offers diversification potential and return opportunities.
• 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.
• Investors should understand how private debt differs from other financial instruments before investing.

What is private debt? Definition and explanation

Private debt refers to the extension of corporate credit to companies by non-public institutions such as banks or investors. In contrast to public debt, where companies issue bonds on public markets or receive loans from banks, companies obtain debt capital from private lenders. Private debt has gained in importance in recent years and is used by both institutional investors and affluent private investors.

Compared to traditional bank loans, private debt often offers more flexible terms and tailored loan arrangements. This allows companies to access alternative financing solutions, particularly when they have difficulty obtaining credit from conventional banks.

Private debt investors, in turn, can diversify their portfolios and access return opportunities by investing in corporate lending.

How does private debt differ from other financial instruments?

Private debt differs from other financial instruments available to private investors in several key ways.

Some important distinctions, based on common investment products:

• Public bonds: Unlike public bonds issued by corporations or government institutions on public markets, private debt is a non-publicly traded security. Private debt investors invest directly in loans to companies and receive interest payments in return, and possibly also a share in company profits (mezzanine).
• Equities: Private debt contrasts with equities, which represent ownership interests in a company. While equity holders benefit from price gains and dividend payments, private debt investors receive fixed or variable interest payments and are generally not entitled to company shares.
• Private equity: Private debt also differs from private equity, in which investors provide equity capital to companies. Private debt investors, 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 expanded rapidly due to prolonged low interest rates and high investor demand. Private debt opens up liquidity options for growing companies and gives investors return opportunities compared to public debt instruments. Private debt is therefore often regarded as an asset class in its own right, having originally been considered a subcategory of private equity. This is also linked to the fact that private debt investments frequently finance leveraged buyouts, i.e. debt-financed company acquisitions.

The international private debt market is one of the fastest-growing private markets and is now the third-largest private market after private equity and real estate. 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, and real estate by 9.1 percent over the same period.

Private debt: market size in Switzerland

The market for private financing solutions is also growing in Switzerland, not least due to the general economic conditions. As it is a non-public market, statistics are often based on estimates. However, Lucerne University of Applied Sciences and Arts has already documented the growing importance of corporate financing with private debt in a 2019 study.

The key findings from the study:

• The Swiss private debt market volume is around three billion Swiss francs.
• The global growth of private debt is continuing.
• Although banks will remain the main lenders, alternative forms of financing such as private debt are growing.
• Analogous to private equity growth rates, double-digit growth rates are expected to continue.
• Investor interest in private debt is strong.

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. For a growing number of investors, private debt offers the opportunity to further diversify their asset structure.

Thanks to innovative asset managers such as Everon, smaller investment amounts can now be invested in this asset class. Depending on the project, investments as low as CHF 10,000 are possible with Everon. Read more about asset management at Everon if you are interested.

Private debt is primarily suited to investors with a long-term investment horizon who are not dependent on short-term availability. This requires not only appropriate expertise, but also sufficient risk capacity. Private debt shows a low correlation with listed securities such as equities or bonds.

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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 receive a return in compensation that typically exceeds that of publicly traded investments. 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.

Beyond the general advantages of alternative asset classes such as diversification and low correlation with public markets, private debt brings specific additional characteristics:

• 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 are prioritised over equity holders.
• Contractual interest payments: Returns are contractually defined on the basis of an interest rate, providing greater predictability than equity investments.
• Close relationship with borrowers: Private lenders typically maintain closer relationships with borrowers than standard loans do. This often contributes to the success of the company in question.
• 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. 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, private investors may find it difficult to sell their investment early. This is because the secondary market in private debt is comparatively underdeveloped.
• Credit risk: Private debt investments carry an elevated risk that the borrower will be unable to meet its obligations. This can arise from payment difficulties, insolvency or other economic challenges. The risk depends in part on the seniority of the debt instruments in the event of insolvency (senior or subordinate to other claims).
• Concentration: Private debt investments can often 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: Unlike publicly traded securities, private debt investments often offer less transparency regarding the company, the borrower or the specific terms of the investment.
• Limited regulation: Compared to publicly traded securities such as equities or bonds, investors cannot rely on government regulation to review investment guidelines. In-depth financial knowledge, particularly in the area of credit financing, is required.
• Interest rate risk: Private debt investments may be tied to variable interest rates. Although variable rates allow investors to benefit from rising interest rates, they also increase credit risk for borrowers. Today, most private debt portfolios have a predominance of variable rates, often with an interest rate floor.

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Why does private debt require professional expertise?

Private debt is a complex asset class requiring specific expert knowledge. Private investors generally lack the expertise and access to information needed to assess this asset class independently. It is therefore important to involve professionals in the form of fund managers or specialised asset managers in managing a private debt portfolio.

Challenges of the financial markets

Financial markets face many challenges, including inflation, global economic developments, political tensions and high debt levels. These factors can significantly affect the risk profile of private debt investments. Experts with in-depth market knowledge can correctly interpret these factors and make informed decisions to best position the portfolio.

Market analysis

Analysing and evaluating private debt investment opportunities requires specific know-how. Selecting suitable borrowers, assessing credit risk, evaluating repayment capacity and negotiating loan agreements all require expertise and experience. Private debt experts are able to assess the quality of borrowers and their business models.

Professional asset management

Managing risk and implementing appropriate diversification also play a critical role. Professionals can help distribute the portfolio across borrowers, industries, geographies and instruments. They have access to a broad network of borrowers and can provide a balanced mix of different types of private debt investments, such as senior secured loans or mezzanine capital.

Access to expert research

Involving experienced asset managers in managing a private debt portfolio allows private investors to benefit from their expertise and experience. Experts typically have access to extensive information and resources to effectively manage the portfolio and ensure appropriate risk management.

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What investment strategies and financing instruments exist in private debt?

The majority of private debt investments are in unlisted private debt funds. These funds differ both in their strategy and in the debt instruments they offer.

The financial instruments fall mainly into the following categories:

• Loans with senior collateralisation (Senior Secured Loans)
• Loans with subordinated or no collateralisation (Junior Unsecured Loans)
• Mezzanine instruments (ranking behind other 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 investors allow loans to be structured quickly and flexibly. Among other things, they can waive interest payments for a certain period or take a more flexible approach to credit ratings. Direct lending investors are compensated for these flexible components with a comparatively higher interest rate.

Distressed debt

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

With distressed debt, investors commit to companies in a difficult phase that nonetheless have the potential to recover and generate returns once the financial problems are resolved.

Mezzanine capital

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

Mezzanine capital is typically used to supplement a company’s equity and provide additional financing for acquisitions, growth investments, capital increases or corporate restructuring. It can also be used when traditional bank loans are unavailable or insufficient.

Compared to traditional equity, mezzanine capital carries a higher interest rate but also involves a higher risk for the investor. Mezzanine providers often have the right to share in company profits or to convert their receivables into equity at a later date.

Private debt fund of funds

This strategy is comparable to a traditional fund of funds. Depending on the strategy, the private debt fund of funds invests in several debt funds and thereby offers investors greater diversification.

Special situations

Private debt funds specialising in so-called “special situations” look for opportunities to provide capital and help companies navigate specific challenges.

Occasions for special situations investments can be varied, for example companies planning an expansion or acquisition in a specific market segment that require tailored financing solutions.

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.

Frequently asked questions about private debt

What is private debt? Private debt refers to the provision of debt capital to companies by non-public institutions or 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 (specific financing occasions) 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 investments are suitable only for investors with an appropriate risk profile and a long-term investment horizon.

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. Analogous to global trends, further growth is also expected in Switzerland.

Is private debt suitable for private investors? Private debt is suited to investors with a long-term investment horizon and the willingness to commit capital for several years. Sufficient risk capacity and specialist knowledge are prerequisites. This article does not constitute investment advice. Anyone assessing private debt investments should seek guidance from an independent professional.