What is corporate lending?
Corporate lending is the process of providing loans or credit to businesses or corporations to finance their operations, projects, or growth.
About corporate lending
Corporate lending: The origination of loans to companies secured by their cash flow and equity value – is a key segment within the broader private credit market and is divided into two main categories: direct lending and special situations.
Portfolio role: In a diversified portfolio, direct lending provides a stable core exposure with attractive risk-adjusted returns. The distinction between sponsored and non-sponsored loans helps balance yield potential with risk, aligning investments with the investor's risk tolerance and return expectations.
Direct lending
Direct lending involves providing loans, typically senior or first in the capital structure, directly to businesses. The market can be further divided into sponsor-backed loans, where private equity firms are the owner, and non-sponsored loans, which are usually family-owned or privately-held companies with limited access to capital markets.
How do private credit strategies make money?
Special situations
Special situations in lending refers to financing scenarios that fall outside of standard, corporate lending practices and often involve higher risk, higher returns, and customized terms.
For instance, these include loans to companies needing more leverage or having unique financial needs, such as growth opportunities requiring upfront capital with cash flows not realized until later.
These strategies are often flexible and will buy liquid loans on the secondary market when such opportunities present better return potential than originating new debt with a similar risk profile.
Special situations often involve payment-in-kind (PIK) deals, where interest payments are added to the loan balance at a future date. This category offers potentially higher returns but requires strong risk management and a strong ability to assess the future sale price of the business.