Investors entering the private credit investment space are generally aware of the risk profile of their investment and the yield on offer, and comfortable with that risk return trade off.

Particularly single asset private credit investors where there’s transparency of the risk return profile of their investment.

While grouping of assets can provide lower risk through diversification, problems however can arise when quality assets are grouped with those of poorer quality, or even worse, when poorer quality assets are grouped with poorer quality, just like CDOs were.

Of late, some private credit investments have faltered, and converted to private equity, resulting in the outcome to the investor being significantly different to what they initially signed up for.

In which case, the investor is now faced with some interesting and unintended issues.

• Converting from private credit to private equity moves the investor a long way up the risk profile ladder, and away from where they were originally invested as a private credit investor.
• The yield on a private equity investment should be significantly higher than that of private credit, to match the higher risk profile of the underlying private equity investment.
• The newly acquired private equity investment is obviously a distressed business given it couldn’t meet its debt obligations to the private credit investors. Investing in such a distressed asset is probably far from the quality asset the private credit investor would normally consider investing in.
• The investor is now invested in a business that wasn’t performing well in the first place, that is now being managed by new owners who likely have little expertise in how to manage it.

There’s no doubt private credit has a place in the current investment landscape, but investors need to be fully aware of what could happen if their investment fails, particularly if they get converted into private equity.

Phil Smith | AL Capital
Head of Distribution | Director

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