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Private credit has become one of the fastest-growing segments in alternative investing, drawing interest from institutional investors and finance professionals alike.
If you’re looking to go beyond the basics, our distressed debt case study, LBO model or WSO modelling courses are especially useful.
Historically, private credit funds had played a limited role prior to the global financial crisis, often as the provider of the final portion of financing, taking the highest level of credit risk in typical tiered capital structures.
Following the global financial crisis of 2007-2008, private credit funds have increased their activity significantly. These funds are now often the sole provider of debt financing on a transaction, playing the role that banks played before the crisis (also called direct lending).
While the market for private credit in Europe is maturing, demonstrated by the large number of private credit funds that are now active in Europe, there remains significant potential for the growth of private credit in other parts of the world, such as Asia and South America.
Today, private credit is growing at a rapid pace. In fact, the private credit market has grown enormously over the past decade, and as demand from institutional investors continues to increase, it is set to expand even further. This has been evidenced by Preqin, which claims that not only the total assets allocated by investors in this category nearly doubled since 2020 to $1.6 trillion, but it’s also expected to reach $2.3 trillion total assets by 2027.
It is also important to note that “private credit” is a rather generic name. In fact, when talking about private credit, it is essential to note that there are a multitude of private credit investments, some riskier than others. We split private credit investments into the categories below, though other types of investments could be included:
The team that supports a portfolio in the private credit market needs a very specialized set of skills, and even though companies nowadays tend to make significant investments in technology, that alone won’t be sufficient: the team must also be right.
As such, an investment professional at a private credit fund must be sharp, confident, and a team player to ensure that the hours spent on sourcing, executing, and closing transactions pay off — not only in terms of good investments but also in fostering an enjoyable work environment.
It is on this basis that we have set ourselves up to present you with the technical and soft skills that are essential to excelling in the private credit sector. We hope that you find these skills useful.
Mastery of credit analysis involves assessing the creditworthiness of borrowers by analyzing financial statements, cash flow projections, and industry trends. It requires the ability to identify key risk factors and determine appropriate lending terms and structures. Practical credit analysis is crucial for making informed investment decisions and managing portfolio risks efficiently.
Ultimately, as an investment professional, what you want to understand is if the investment you will make will yield the expected results, right? Well, this essentially depends on a few factors:
In the end, for you to make a return aligned with or above your forecast, your net present value has to be at least 0, assuming your original required rate of return. For this, you will need to understand the probability of collections, defaults, value collateral backing the loan, etc.
In addition, you should also be able to factor in any micro and macro risks that can impact your analysis. Practically, this is what credit analysis actually is.
Proficiency in financial modelling is essential for evaluating investment opportunities and predicting potential outcomes. Private credit professionals use financial models to conduct scenario analyses, assess cash flow projections, and analyze the impact of various economic factors on loan performance.
Strong financial modelling skills enhance decision-making capabilities and support strategic investments and portfolio management. Following the previous point on credit analysis, this is essentially where you put together your assumptions and test them on the data you have. Ultimately, your goal is to be confident in your analysis so that the investment performed yields positive results.
Nevertheless, note that you might be very good at credit analysis but not so good at financial modelling. Therefore, you need to ensure that the model is well conceived, for which you might require not only checks to confirm cashflows, etc. but also follow the 4- eyes principle to assure that the model is on point.
In the end, that model will be used as a basis of an analysis that will be presented to the investment committee (IC), and if all goes well, you will have the green light to pursue the investment.
Private credit professionals must possess robust risk assessment and management skills to navigate the complexities of the debt markets. This includes evaluating credit risk to determine the likelihood of default, analyzing default rates across different asset classes, and understanding the challenges associated with illiquidity and secondary market transactions. To better understand distressed debt and how it is used, check out our distressed debt case study.
Effective risk management strategies help mitigate potential losses and optimize portfolio performance. One has to constantly stay up-to-date with news and events that might require changes in assumptions used in models for investments, as well as portfolio management (investments that happened in the past and are currently being managed/monitored by a PM team). Being actively involved in the credit world is essential to becoming a solid investment professional and is praised in any top-tier credit investing team.
A comprehensive understanding of the legal and regulatory environment related to debt financing is essential for private credit professionals. This includes knowledge of laws governing private credit transactions, compliance requirements imposed by regulatory bodies, and the implications of regulatory changes on lending practices. Most investment professionals have a finance background, hence the legal side might be challenging.
It is essential to quickly grasp any legal implications of a transaction or possible implications of change in laws. Furthermore, as part of a transaction, documents such as non-disclosure agreements (NDA) and sale-and-purchase agreements (SPA) might have to be signed, hence having the ability to understand these documents (without the assistance of a lawyer) can save you and your fund time and money.
Having a broad understanding of diverse industry sectors is essential for private credit professionals. This knowledge enables them to identify unique investment opportunities and potential risks, providing a competitive edge in the market.
Examples of sectors that are particularly relevant to the private credit industry today include healthcare, technology, real estate, energy and consumer goods. Each industry has its own dynamics, market trends, and regulatory considerations that impact investment decisions and risk assessments.
Professionals with sector-specific expertise can effectively identify opportunities and risks (and sometimes get jobs more easily), assess market conditions, and evaluate the financial health of companies within these sectors. This insight guides strategic lending decisions and supports effective investments and portfolio management.
Moreover, a deep understanding of industry sectors allows private credit professionals to offer tailored financing solutions that meet the specific needs of businesses, enhancing their competitiveness and value proposition in the market.
If you’re looking to develop a career in the private credit industry, several certifications can help you strengthen your technical skills. Among others, we can name the CFA (Chartered Financial Analyst) and the accounting charters (e.g. ACA/ACCA/CPA). Still, it is worth considering specialized credit analysis and financial modelling certifications.
These certifications demonstrate expertise and commitment to mastering critical skills required for success in this field, which will certainly not go unnoticed by recruiters and potential employers.
While we’ve focused a great deal on technical skills, let’s not forget that soft skills are also incredibly valuable. As such, we want to highlight the importance of negotiation, relationship management, patience, and diligence in managing and monitoring debt investments.
While technical skills are important for grasping the project’s complexities, the soft skills ultimately shape the success of a project manager in achieving the project’s objectives.
Ultimately, transactions are a people’s business, and you need to be likeable and have positive energy not only to get deals through your connections but also to positively engage with your peers whom you spend a considerable amount of time with.
The landscape of private credit has evolved significantly since the global financial crisis of 2007-2008, transforming from a supplementary provider of financing to a primary player in debt markets comparable to traditional banking institutions.
This expansion is particularly evident in Europe, where a multitude of private credit funds now operate. This underlines the importance for anyone willing to build a career in private credit to develop and maintain a broad set of skills.
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In addition, you might find the courses below useful if you are trying to break into high finance or enhance your investment skills:
Elite Financial Modelling | Excel on Hedge Fund Interviews | Master IB Interviews | LBO Financial Modelling | Private Equity Deals Process | Private Equity Interviews
