A Breakdown of Private Credit Strategies by Type

Published on
June 27, 2023
Written by
Dot Investing Team
Dot Academy

Dot Investing Team

Private credit strategies encompass a range of investment approaches that primarily focus on providing credit or debt financing to privately-held companies. These strategies have gained substantial traction in recent years due to their potential for attractive risk-adjusted returns and diversification benefits. Unlike traditional bank lending, private credit strategies involve institutional investors, such as pension funds, insurance companies, and private equity firms, deploying capital in the form of loans or credit facilities.

While private credit strategies share similarities with private equity, there are distinct differences between the two. Private equity primarily involves equity investments, where investors acquire ownership stakes in companies. In contrast, private credit strategies focus on debt investments, providing loans or credit facilities to companies. This divergence influences factors such as risk profiles, investment structures, and investor roles.

Now, let's delve into common private credit strategies:

  1. Direct LendingDirect lending involves providing loans directly to companies without intermediation from traditional banks. It offers borrowers an alternative to bank financing and provides investors with opportunities for attractive risk-adjusted returns. Direct lending strategies often involve customized terms and can cater to a wide range of borrowers, from middle-market companies to larger enterprises.
  2. Distressed DebtDistressed debt strategies focus on investing in the debt of companies facing financial distress or undergoing restructuring. These strategies target companies with the potential for recovery and seek to capitalize on distressed assets by purchasing debt at discounted prices. Distressed debt investors may actively participate in the restructuring process or pursue other strategies to maximize returns.
  3. Mezzanine DebtMezzanine debt occupies a hybrid position between equity and senior debt. It combines features of both, providing a flexible capital solution to companies. Mezzanine debt typically offers higher returns than senior debt but carries higher risk. Investors in mezzanine debt may benefit from a combination of interest payments and potential equity participation through warrants or convertible features.
  4. Special SituationsSpecial situations strategies focus on investing in unique credit opportunities that arise from specific circumstances, such as mergers and acquisitions, restructurings, or complex financings. These strategies require expertise in evaluating and capitalizing on situations where traditional financing sources may not be readily available or suitable. Special situations investors often seek to provide tailored financing solutions to companies facing challenging circumstances.
  5. Venture DebtVenture debt strategies involve providing debt financing to early-stage or growth-stage companies, typically in the technology and innovation sectors. Venture debt complements equity financing and helps companies extend their cash runway and support growth without diluting existing equity holders. This strategy offers the potential for attractive returns through interest payments and potential equity kickers.

Direct lending, distressed debt, mezzanine debt, special situations, and venture debt are common strategies within this asset class. These strategies provide opportunities for attractive risk-adjusted returns and are often effective diversifiers in a wider portfolio. As ever, investors should conduct thorough due diligence and carefully consider both the credit and legal risks they are willing to take in exchange for the desired return.


SEWISKIS: "Private Credit Funds: An Introduction and Comparison to Private Equity Funds" (Private Capital Report, Issue 1)

Cambridge Associates: "Private Credit Strategies: Introduction"

Preqin Academy: Lesson 4 - "Private Debt" (Asset Class 101s)