1. What are the different types of private credit strategies?
Private credit strategies provide capital outside of traditional public markets, often to borrowers who cannot easily access bank or bond financing. Common approaches include:
- Direct Lending – Loans made directly to mid-sized companies, typically with floating rates, offering steady income but carrying credit risk.
- Distressed Debt – Buying the debt of troubled companies at a discount with the potential for high returns if the business recovers or restructures.
- Special Situations / Opportunistic Credit – Flexible investments in companies facing unique financing needs, mergers, or turnarounds.
- Structured Credit (e.g., CLOs) – Investing in tranches of securitized loan pools, which provide varying levels of risk and return depending on seniority.
2. How do direct lending, distressed debt, and CLO tranches differ?
- Direct Lending: Offers predictable cash flows and less market correlation, but limited liquidity since loans are not publicly traded.
- Distressed Debt: Higher risk but potential for outsized returns if the company restructures successfully. Requires strong legal and restructuring expertise.
- CLO Tranches: Pool leveraged loans into structured products; senior tranches are safer with lower yields, while junior tranches are riskier but offer higher potential returns.
3. What does the illiquidity premium mean — and how do I evaluate it?
The illiquidity premium is the extra return investors demand for tying up capital in assets that cannot be easily sold or traded. To evaluate it, investors compare:
- Compensation for lack of liquidity (extra yield vs. public market equivalents).
- Underlying risk of the borrower or structure.
- Investment horizon alignment (long-term investors like pensions/endowments are better suited to capture this premium).