Private Debt

Private debt has grown from a niche into a major asset class as non-bank lenders took over financing that banks once provided. This module shows where debt fits across the life of a private investment, from venture loans with warrants to unitranche buyout financing and fund-level facilities, compares the main instruments by seniority, pricing and terms, applies the credit ratios lenders use to size and monitor loans, and evaluates what private credit adds, and risks, in a strategic asset allocation.

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What you will learn

1. Explain how debt financing is used across the life cycle of private companies, real assets and funds, including venture debt, acquisition financing, asset-based lending and fund-level facilities.

Venture debt is extended to VC-backed companies after equity rounds, extends runway, reduces dilution and earns warrants as well as interest.
Buyout debt includes first- and second-lien loans, high-yield bonds, mezzanine and unitranche, sized as multiples of EBITDA.
Asset-based lending and revenue-based financing serve companies with collateral or revenue but limited profits.
Subscription lines are secured on uncalled LP commitments; NAV loans are secured on the portfolio's value.
Private lenders offer speed, certainty and flexibility; they earn an illiquidity and complexity premium and tighter covenants.

2. Compare leveraged loans, high-yield bonds, convertible bonds, mezzanine debt and unitranche financing by seniority, security, pricing, covenants and liquidity, and calculate blended financing costs.

Leveraged loans: senior secured, floating rate, prepayable, high recoveries; mid-market loans keep maintenance covenants.
High-yield bonds: fixed coupons, non-call periods, incurrence covenants and tradability.
Mezzanine: subordinated, cash plus PIK interest and warrants, high target returns, low recoveries.
Unitranche: one loan, one lender group and a blended rate, often split privately into first-out and last-out pieces.
Blended cost = weighted average of tranche rates; unitranche pricing can exceed it, the premium paid for speed and certainty.

3. Analyze a private borrower's credit profile using leverage, coverage and cash flow ratios, covenant headroom and asset-based measures such as loan-to-value and debt service coverage.

Leverage = debt / EBITDA; interest coverage = EBITDA / interest; FCCR = (EBITDA - capex - cash taxes) / (interest + scheduled principal).
FCCR captures capital intensity and amortization that interest coverage ignores.
LTV, DSCR and debt yield measure asset-backed loans in real estate and infrastructure.
Covenant cushion for a leverage test = 1 - current leverage / maximum leverage.
Check the EBITDA definition (add-backs) and stress coverage for higher floating rates.

4. Evaluate the risk and return of private debt within a strategic asset allocation, including loss-adjusted yields, floating-rate exposure, illiquidity, fund leverage and the differences between senior and junior strategies.

Return = base rate + spread + illiquidity premium + fees/OID - expected loss - manager fees; EL = PD x LGD.
Senior direct lending: floating income, high recoveries, return driven by avoiding losses.
Mezzanine and junior debt: higher coupons and kickers, low recoveries, equity-like risk.
Floating rates cut the lender's duration but raise borrowers' interest burden and default risk when rates rise.
Smoothed marks, illiquidity, weaker covenants and fund leverage are the hidden risks; size within a liquidity budget.

Module at a glance

Debt appears across the life cycle: venture debt with warrants, growth and asset-based loans, buyout financing, real-asset loans and fund-level facilities.
Subscription lines rest on uncalled commitments; NAV loans rest on portfolio value and add fund-level leverage.
Leveraged loans float and rank first; high-yield bonds are fixed with call protection; mezzanine is subordinated with PIK and warrants; unitranche blends them into one loan.
Credit analysis rests on leverage, interest coverage, FCCR, LTV and DSCR; check EBITDA add-backs and covenant headroom.
Loss-adjusted yield = yield - PD x (1 - recovery); senior lending earns its premium by avoiding losses, junior debt by taking equity-like risk.
Floating rates protect lenders' income but weaken borrowers when rates rise.
Smoothed marks, illiquidity and fund leverage mean private credit is riskier than its reported volatility suggests.

This free module has 4 lessons, 16 practice questions with full explanations and 1 essay case with a model answer.

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