Private Credit Investment Strategies
Private credit is usually viewed as an extension to existing fixed income allocations, serving as a potential income enhancer and diversifier. Often times, private credit refers to direct lending to small or medium-sized companies that cannot tap into public credit markets, but it also includes distressed and special situation markets.
Why invest in private credit?
Yield
Private credit may offer higher income than traditional fixed income (syndicated high yield or leveraged loans) markets. Companies may be stressed or in unique situations that prevent them from accessing traditional markets, meaning they are willing to pay a premium to access capital.
Portfolio diversification
For example, direct lending, in part to the bespoke nature of deals, may offer very low correlation to traditional public markets, therefore resulting in diversification benefits.
Staple through market cycles
Private credit strategies can capitalize across the business cycle with a multifaceted deployment approach throughout periods of economic expansion, downturn and recovery.
Can private credit continue to perform?
We think so—and see an unusual opportunity for investors as measures of risk decline, yet compensation, in the form of yield, could potentially go up.
Learn More
Ready to invest in private credit or other alternative investments? Find the right strategy with your J.P. Morgan team today.
Private Credit Platform Strategies
Debt origination strategies
Direct lending/Senior debt:
Predominantly first lien and secured term loans at the top of a company’s capital stack
Junior debt (second lien/mezzanine):
Focuses on second lien, mezzanine and other private high yield debt instruments
Distressed and niche strategies
Special situations:
Complex financing arrangements or structure of cash flow streams generated by specific assets
Distressed debt:
Impaired capital structures where sponsors can deploy capital across performing and non-performing private debt, preferred and common equity
Moving up in the capital structure
The capital structure displays how a company is financed and its balance sheet composition (type and amount of debt versus equity). This structure determines which capital must be repaid in the event of bankruptcy. Senior debt takes precedence for repayment, while equity is the lowest priority for repayment, making it a higher-risk investment.
Private credit debt origination strategies such as senior debt loans and junior loans are typically lower-risk investments compared to traditional fixed income bonds or equities.
A full spectrum of alternative investment strategies
Frequently Asked Questions
Private credit consists of loans, bonds and other credit instruments issued in private offerings, which means they do not trade in the public markets. The asset class is broad and fragmented, incorporating a wide range of strategies that lend across the capital structure to a variety of counterparties, as well as buying and selling existing credit assets.
Borrowers (the Issuer)
Typically, small to middle-market companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $5 million to $100 million.
Lenders (the Capital Provider)
Private alternative investments managers play an integral role in the private debt market because they provide issuers capital through their lending platforms.
Lending platforms can include the following:
- Multiple lending vehicles
- Business development companies (BDCs)
- Private debt funds
- Middle-market collateralized loan obligation (CLOs)
- Mutual funds
Investing in private credit and/or private equity could help enhance returns in your portfolio.
The difference between private equity and private credit is private equity is equity ownership of a company, without the stock market, and private credit often refers to direct lending to small or middle-market companies that cannot or choose not to tap into public credit markets to finance their business needs.
An investor in private equity will obtain partial or full ownership of a private company via shares while investors in private credit receive interest payments that is typically higher than what can be found in the traditional fixed income markets.
The difference between private equity and private credit is private equity is equity ownership of a company, without the stock market, and private credit often refers to direct lending to small or middle-market companies that cannot or choose not to tap into public credit markets to finance their business needs.
An investor in private equity will obtain partial or full ownership of a private company via shares while investors in private credit receive interest payments that is typically higher than what can be found in the traditional fixed income markets.
