The majority of institutional investors allocating capital to private debt focus on commitments to unlisted private debt funds. These unlisted private debt funds differ according to strategy, for example direct lending or fund of funds. They also differ depending on the type of debt provided, such as senior debt or mezzanine debt.
The following are considered important aspects of private debt, though not interpreted as strategies:
Collateralized loan obligation (CLO):
this is an investment instrument. It is a security backed by a pool of debt, featuring several levels of credit ratings and repayment structures.
- In a CLO, the investor gains exposure to a diverse portfolio of existing bank loans.
- The investor receives scheduled interest payments from the underlying loans.
Business development company (BDC)
- If the borrower defaults, the investor assumes most of the risk.
: a tax-efficient, US-based, publicly traded private debt fund, structured as a corporate fund. This is perceived as an investment opportunity, rather than a strategy.
- A BDC is designed to help small companies in their early stages of development.
- Bears similarities to a private venture capital and venture debt fund.
- Publicly listed on a stock exchange.
- Most often provides short-term unsecured loans ($2-50mn).
- Often takes an equity position in the company.