Private credit funds are designed to generate enhanced risk-adjusted returns and current income by investing in the debt of strategically identified companies, either by making loans to these companies or acquiring loans in the secondary market.
TAILORED FINANCING SOURCE
Private credit fund managers negotiate directly with small and medium-sized companies seeking a tailored financing solution that is not accessible to them in the public credit markets or through bank lenders, who are subject to strict regulations. Increasingly, large companies are borrowing from private credit managers due to their ability to offer speed, flexibility, and certainty of execution that traditional banks often cannot, particularly in challenging market conditions. The company pays interest, typically at a spread above a floating reference rate, until returning the principal amount at the end of the loan term. In addition, private debt agreements typically include covenants that offer greater protection to the lender, i.e., the fund manager.
FUND INVESTMENT PROCESS – DIRECT LENDING
The fund investment process varies depending on the type of private credit investment strategy. The graphic below provides an overview of the typical fund investment process for a direct lending strategy, one of the most common private credit strategies in the market today.
KEY RISK CONSIDERATIONS
Key risk considerations may include, but are not limited to, the following:
1. Direct lending strategies may also be offered through business development companies (“BDCs”) and interval fund structures.
2. Source: Goldman Sachs Asset Management, October 20, 2022. This is not intended to be an offer or solicitation to employ a specific investment strategy. Past performance is not indicative of future results. Future results are not guaranteed.
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