Private Credit: A Renaissance in Corporate Finance
64 Pages Posted: 17 Nov 2023 Last revised: 1 May 2024
Date Written: March 15, 2024
Abstract
This paper aims to provide new insights into the role of modern debt (credit) capital in the firm, its relationship with equity (share) capital, and the implications of advances in debt markets for corporate finance and corporate governance. The thesis of this paper is that the role of debt and its relationship with equity in the firm, due to recent significant developments in the corporate finance markets after the global financial crisis of 2007-2008, has been transformed. The relatively new, but already very experienced non-traditional providers of debt finance, such as private credit funds, are aggressively competing with traditional finance providers, such as commercial banks, in a dynamic market which is full of unforeseen and large-scale risks.
To the best of our knowledge, this is the first academic paper in law to examine private credit funds and to compare their business model to bank financing from a corporate governance perspective. The paper shows that modern debt providers (i) are interested in the firm’s profit maximisation, (ii) are actively and dynamically involved in the governance of the firm also outside financial distress, and that (iii) corporate loan financing agreements are often expected to be renegotiated (repriced). Based on developments in the corporate finance markets, the paper argues that outside financial distress, debt and equity have become even more overlapping and intertwined than they used to be. The reliance of private credit funds on private (contractual) bargaining can also improve the economic efficiency.
Keywords: corporate finance, private credit, private debt, debt governance, equity and debt, corporate governance, direct lending, private capital
JEL Classification: G01, G30, G32, G33, G34, K2, K22, K29, D8, D90, D92
Suggested Citation: Suggested Citation