Private credit: a renaissance in corporate finance

Abstract

The thesis of this paper is that the role of debt and its relationship with equity in the firm, due to recent significant developments in the corporate finance markets after the global financial crisis of 2007-2008, has been transformed. The relatively new, but already very experienced private credit funds, are competing with banks in a dynamic market which is full of unforeseen and large-scale risks. The paper examines private credit funds and compares their business model to bank financing from a corporate governance perspective. The paper shows that modern debt providers (i) are interested in the firm's profit maximisation, (ii) are dynamically involved in the governance of the firm also outside financial distress, and that (iii) corporate loan financing agreements are often expected to be renegotiated (repriced). The paper argues that outside financial distress, debt and equity have become even more overlapping and intertwined than they used to be.