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Q & A — 14 November 2024

What is a private debt fund and how to invest?

Find out how a private debt fund works in France, its characteristics, advantages and associated risks, and how it differs from a private equity fund.

Are you interested in investing in a private debt fund? Contact us :

Contact our experts

Definition of a private debt fund

A private debt fund is an investment vehicle that raises capital from institutional and private investors and lends it directly to companies. Private debt is a popular alternative financing tool for SMEs and mid-sized companies looking for more flexible, faster and non-dilutive financing.

This financing option has been booming in France and the rest of the world since the financial crisis of 2008 and the partial withdrawal of banks subject to numerous regulatory restrictions (balance sheet clean-up, increased equity capital). Investors' search for diversification and yield, combined with banking disintermediation, has encouraged the emergence of private debt and its financing by the institutional world.

See our private debt funds

Characteristics and operation of these funds

Types of debt

These funds can offer various forms of debt, such as senior loans, mezzanine loans, unitranche loans and private bonds.

Potential returns

Private debt funds generally offer higher returns than government bonds or listed corporate bonds, due to the greater risk associated with unlisted loans.

Investment duration

Investments in private debt funds are often long-term, with maturities ranging from seven years to 10 years or more.

Security and guarantees

Loans granted by private debt funds can be secured by the assets of the borrowing company, offering some protection to investors in the event of default.

Advantages of private debt funds

Portfolio diversification

Investing in private debt funds allows you to diversify your portfolio by adding assets that are uncorrelated with traditional stock markets.

Attractive returns

By their very nature, these funds offer potentially attractive returns, superior to traditional bond investments.

Financing flexibility

Companies benefit from more flexible financing conditions than bank loans, which can include tailored repayment terms and customized interest rates.

Associated risks

Credit risk

The main risk associated with private debt funds is credit risk, i.e. the risk that the borrower will not be able to repay the loan.

Liquidity risk

Investments in these funds are illiquid, with capital tied up for a fixed period, making it difficult to withdraw before maturity.

Market risk

Although private debt funds are generally less volatile than equities, they can be affected by economic conditions and changes in interest rates.

Private debt funds therefore play a crucial role in providing alternative financing solutions for companies, while offering investors opportunities for attractive returns. However, due to the risks specific to unlisted assets, they are mainly suitable for sophisticated investors with the ability to invest over the long term in less liquid investments.

How do they differ from private equity funds?

Private debt and private equity funds have some points in common, but also some differences. Find out which:

Private Debt Funds

Nature of investment :

Investment in the form of unlisted loans or bonds, offering debt financing to companies.

Type of financing :

A private debt fund provides direct loans, including senior, mezzanine, unitranche, or private bonds.

Returns:

Returns can be more predictable.

Risk:

Private debt is less risky compared to private equity, as investors generally have priority in the event of a company's liquidation. However, credit risk (non-repayment of loans) remains.

Liquidity:

Less liquid than public markets.

Private equity funds

Nature of investment :

Subscription to a private debt fund is an investment in the form of equity stakes in companies, involving the purchase of shares in unlisted or development-stage companies.

Type of financing :

Private equity provides venture capital, development capital, leveraged buyouts (LBOs), and other forms of equity financing.

Returns :

Private equity returns are less predictable than those of private debt.

Risk:

Private equity is riskier than private debt, as investors are subordinated in the event of liquidation. Potential returns are higher, but with greater volatility.

Investment term:

Generally longer, at least 8 years.

Liquidity:

Highly illiquid, as with any investment in unlisted assets.

Finally, Private Corner has launched a new private debt strategy, Global Private Debt Strategies.

Warnings and risks associated with unlisted investments

Private Corner is a company approved as a portfolio management company on 05/11/2020 by the Autorité des marchés financiers under number GP-20000038 . Investing in alternative investment funds (AIFs) involves risks of capital loss and liquidity. Investment in the funds is reserved for professional or sophisticated investors as defined in the funds' legal documentation. Past performance is not a guide to future performance, and there is no guarantee that objectives will be achieved. The information provided in this document is for guidance only, based on information available at the date of publication. The analyses and opinions contained herein should not be construed as having any contractual value. The authors cannot be held responsible for the content of this document. This presentation should not be considered as a substitute for the study itself. The recommendation and/or formulation of investment advice by the financial investment advisor will be contained in the said study. Investments in the unlisted asset class are intended for sophisticated investors. This asset class entails the following risks in particular: risk of capital loss, risk of default, liquidity risk. This type of investment has a minimum lock-up period, and investors should pay particular attention to the fact that it is a long-term investment. Anyone wishing to invest in funds managed by Private Corner must be fully aware that their capital is not guaranteed, may not be returned or may only be partially returned, and is not intended to constitute their entire portfolio.

To find out more about how private debt funds or unlisted assets funds work in France, please do not hesitate to contact us:

Private Corner, 161 Rue du Faubourg Saint-Honoré, 75008 Paris, France.
0033 1 83 75 66 94.
contact@private-corner.eu.

Q & A

How much to invest in private equity

As the private equity market opens up to a much wider audience, the question of the ideal amount to invest is being asked more and more frequently.

Q & A

Is there a good market timing in private asset investments?

Private equity investors often ask the question: is there such a thing as good market timing? In the unlisted sector, there are significant differences in performance between managers. And with interest rates rebounding, selectivity is all the more crucial. In particular, you need to identify whether now is the right time to gain exposure to a particular strategy. When it comes to unlisted investments, the notion of ‘market timing’ does not have the same meaning as it does on the stock market.

Q & A

Investment advice: unlisted asset investment funds, for whom and how to invest?

Unlisted investment: why, for whom and what solutions? Find out how to invest in unlisted companies (SMEs, ETIs, start-ups) and build up a portfolio of unlisted assets with Private Corner, a ‘digital native’ asset management company approved in 2020 by the Autorité des marchés financiers, which provides asset management professionals and their clients with an integrated investment platform dedicated to unlisted asset funds.