Private Credit’s Secret Sauce Is Simpler Than It Seems

(Dreamstime)

About the author: Andres Pinter is senior managing director of turnaround & restructuring at Ankura.

Senior. Secured. Debt. If the sturdiness of an asset class were judged solely by its name, there could surely be none better. Even “United States Treasury Bond” doesn’t clang with that kind of iron anymore.

Add in steady low-double-digit returns and you can see why private credit has swelled into a $1.7 trillion colossus forecast to soar to $2.6 trillion by 2029. But here’s the part most investors miss: Those handsome risk-adjusted returns aren’t just about capital structure seniority. The real talent isn’t just in writing the loan, it is in keeping the value from vanishing when the borrower stumbles. Enter the restructuring goons.

The unitranche loan—private credit’s greatest hit—exists because banks were too slow, bureaucratic, and too skittish to stomach real risk. Private credit sprang to life the moment a cadre of sharp young bankers recognized that the so-called genius of private equity was really just leverage—mountains of leverage, preferably unencumbered by pesky covenants. And so private credit was born.

One reason unitranche lending is so appealing to investors is that lenders hardly ever leave the table empty-handed. In the worst case, they don’t get a goose egg, they get the keys to the borrower. Maybe it is a fire sale, maybe a wind-down. But there is usually still some upside. And because it is senior secured debt, those lenders are front of the line when recoveries are doled out. The result has been steady, double-digit returns with remarkably few epic failures. For the larger seasoned managers, annual loss rates have hovered comfortably below half a percent.

It is easy to imagine these steady returns are a product of good deal structuring. But the real edge shows up later, when the music stops and the lights come on. The truth is, the private credit money keeps flowing because of restructuring crews.

Inside the funds, they are called fixers, goons, the muscle tasked with prying the money out of the borrower’s clenched fists. When a company breaches a covenant (in the rare cases those still exist), these enforcers amend loans, squeeze fresh support out of sponsors, demand more collateral, and sometimes even advance new money themselves. And if all else fails, they don’t blink—they equitize their debt and then own and operate the business.

It is worth mentioning here that this is why covenants matter. If you strip them out, you’re not empowering borrowers, you’re disarming lenders. With more than 90% of broadly syndicated loans now cov-lite, too many lenders have sent their fixers onto a battlefield armed with squirt guns. Disciplined managers still bargain hard for real covenants when they can. Without them, the goons can’t be goons.

Like that old real estate adage about “location, location, location,” investing has its own refrain: manager, manager, manager. The difference between the flood of new entrants in private credit and the veterans comes down to one thing, and that is restructuring chops. Money keeps pouring into private credit, so much so that it is inevitably becoming a commodity. But when the tide goes out (and it always does), it is the funds with real restructuring muscle that will still be standing.

The institutional knowledge inside those restructuring teams is the real moat. Everyone else is just renting returns until the cycle turns.

And turn it will. Some investors are going to lose big by picking the wrong managers. Always happens. History repeats. The best you can do is ask one simple question before handing over capital: What does your restructuring function look like? Show me the case studies. Tell me what you did when things went wrong, not just when they went right.

In the world of private credit, it isn’t the first check you write that matters. It’s the last check you collect.

Guest commentaries like this one are written by authors outside the* Barron’s newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to ideas@barrons.com*.**