May 29, 2025 • 34 mins
In this episode, we dive into the world of private credit and its relationship with private equity. Our hosts, Rory, Emily and Ed, share their expertise on the differences and similarities between these two asset classes.
Key Takeaways:
Private credit refers to debt financing that is not publicly traded and is typically provided by private companies or investors.
Private credit is not a new phenomenon, but its terminology has become more prominent in recent years as a separation from traditional banking and debt financing.
Private credit is often used in conjunction with private equity, and both asset classes share similar players, such as limited partners (LPs) and endowments.
The risk profile of private credit is different from private equity, with private credit being generally less risky but offering lower returns.
The capital stack is a key concept in private credit, with different levels of risk and return, including senior secured, mezzanine, and equity.
Private credit can be used to provide financing for companies that may not be able to access traditional bank debt or may need additional capital to support growth.
Private Credit vs. Private Equity:
Private credit provides steady cash flows through monthly or quarterly interest payments, whereas private equity returns are typically realized through a lump sum at the end of the investment period.
Private credit is generally less risky than private equity, but offers lower returns.
Private credit can be used to balance a portfolio by providing a steady income stream, whereas private equity is often used for growth and upside potential.
Private Credit Market:
The private credit market is growing rapidly, with assets under management expected to exceed $10 trillion by 2032.
Private credit funds are used to provide debt financing to companies, and can be structured in various ways, including mezzanine debt and preferred equity.
The private credit market is less regulated than traditional banking, offering more flexibility in structuring and terms.
Takeaways for LPs:
Private credit can be an attractive option for LPs looking for steady cash flows and reduced risk.
Private credit can be used to balance a portfolio by providing a steady income stream.
LPs should consider private credit as a complement to private equity investme
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
emily-sander_1_05-15-2025_15 (00:34):
We are back with the private equity
experience and today we areadding a new acronym to the Mix
pc,
squadcaster-gg3c_1_05 (00:41):
goodness.
emily-sander_1_05-15-2025_1 (00:42):
not your computer, not PC versus
Mac.
It is
squadcaster-gg3c_1_05-1 (00:46):
correct
emily-sander_1_05-15-2025_1 (00:47):
not politically correct.
That's not this podcast at all.
Um, we're talking private creditand private equity.
How these are different and howthey frequently go together.
squadcaster-gg3c_1_05-15- (00:59):
Yeah.
emily-sander_1_05-15-2025_1 (01:01):
Who wants?
squadcaster-gg3c_1_0 (01:01):
frequently do.
emily-sander_1_05-15-2025_ (01:02):
Yes.
Okay.
Who wants to start with the,like what, what, what is private
credit?
You just talked about privateequity.
What is private credit?
squadcaster-gg3c_1_05-15-2 (01:10):
I'll start by saying it's a, it's a
term that you hear a lot morenow than you did.
Say 10 years ago.
But the fact is it's not a new,it's not a new phenomenon.
I mean, ed and I have beenworking with private credit
partners for damn near 20 yearsnow.
Uh, it's taken on a little bitmore of a, um, you know, a
terminology position in themarket as a separation from
(01:32):
basically, accessing debtfinancing through banks and
other, you know, income markets.
But in the, in the name, it's,it's implied, it's private.
It's a private, it's a private.
Market access to debt, uh, goesalongside private equity.
There's some similarities andyou know, a few differences too.
emily-sander_1_05-15-2025 (01:53):
Wait, so Okay.
It's private, meaning it's noton like a public trade, publicly
traded, um, market.
It's credit, which is like debt.
It reminds me of like a creditcard debt.
Is that
squadcaster-gg3c_1_05-15- (02:07):
yeah.
emily-sander_1_05-15-2025 (02:07):
size?
squadcaster-gg3c_1_05-15-2025 (02:07):
I mean, there are some, there are
some large firms, just likethere are some large private
equity firms that.
their shares in public markets.
But what what it really means isyou're a private sector access
to financing for your businessor your assets.
emily-sander_1_05-15-2025 (02:27):
Okay.
What would, um.
We have some similar playersthough, right?
Like we're still talking like,uh, LPs or whatever that's
called on the PC side, we'retalking like endowments and
insurance companies.
And those are the same peoplefunding pc.
Right.
Okay.
And then like what's differentabout like the whole times or
(02:49):
like the, or is it more, is itmore or less risky than private
equity?
Like what are we talking abouthere?
squadcaster-gg3c_1_05-15- (02:54):
place to
ed-barton_1_05-15-2025_15 (02:54):
Great
squadcaster-gg3c_1_05-15- (02:54):
Risk.
Risk.
And I'll just kick it off and Edcan wonk it out.
'cause this is, this is Ed.
I just, I'll just sit back andlisten to Ed, but, but yeah,
remember everybody that.
You know, when you look at acapital structure, there's
levels of risk generallyspeaking to different levels in
your capital structure.
Otherwise, as we say in ourbook, the capital stack, so on
(03:15):
the on the top end, lowest riskis your senior lenders.
Because you have other folksbelow that that take the first
hit before, um, before anythinghappens with, with that senior
de position.
Then below that you havepotentially mezzanine uh, debt,
which is sort of a, if you wantto think about it really simply,
it's kind of like a hybridbetween debt and equity.
(03:37):
And then lastly, you haveequity, which is at the bottom
of the capital stack representsthe highest risk, but also the
highest return.
And so that's the basics.
Ed can walk it out from there.
Probably sprinkle in riskpremium in terms of that, uh.
In terms of that description,
ed-barton_1_05-15-2025_15 (03:52):
Yeah.
So at each, at each one ofthose, let's call it three basic
levels.
So you've got your and, and eachone of these components breaks
into a bunch of sub-components.
So you could have
squadcaster-gg3c_1_05-15-2 (04:02):
yes.
ed-barton_1_05-15-2025 (04:03):
secured, senior unsecured, junior
secured, junior unsecured.
Specific secured, and then youcould have unsecured mezzanine,
and then you could havemezzanine with participation.
And then you can have preferredequity and equity.
And
squadcaster-gg3c_1_05-15- (04:16):
Yeah.
ed-barton_1_05-15-2025_1536 (04:17):
the capital stack could look like,
like a rainbow a, a financingrainbow with all sorts of
different colors of stuff inthere.
So
emily-sander_1_05-15-2025_1 (04:27):
Do,
ed-barton_1_05-15-2025_1536 (04:27):
uh.
emily-sander_1_05-15-2025_1 (04:27):
you wanna briefly explain like, the
function, like why there's,there's different, not, not each
specific one.
We were like in high school fora while with like senior and
junior, and then we moved tolike secure, insecure, like,
like just generally speaking.
What are all those things youmentioned?
I.
ed-barton_1_05-15-2025_1536 (04:40):
So, so generally speaking, each one
of them has a different riskpremium associated with them.
so the
squadcaster-gg3c_1_05-15-202 (04:48):
we go.
ed-barton_1_05-15-2025_1536 (04:48):
the one that's at the top, so senior
secured essentially says, look,this is, we get paid first.
So anything happens with abusiness, we get paid first.
And.
Our position, our debt is alsosecured by something specific.
So it's not just a general debtof the business.
It may be secured by patents, itmay be secured by inventory, it
(05:10):
may be secured by real estate.
It may be, so not only do wehave the, we get paid first if
anything happens, but we alsohave a security interest in
assets that we can seize that noone else can use to get paid.
emily-sander_1_05-15-2025_15 (05:26):
Is it like a lien on a house or
like a HELOC loan on a.
ed-barton_1_05-15-2025 (05:29):
exactly.
So, so your, your first mortgageon your house is your senior
secured.
Then if you have a heloc,they're gonna be a junior
secured they're behind, they'rebehind the, the senior secured
but they're still secured by thehouse.
But the first position gets paidoff first before the next one
does.
squadcaster-gg3c_1_05-1 (05:49):
Mm-hmm.
ed-barton_1_05-15-2025_1 (05:50):
Right.
Each, each one of thosecompanies use those because they
want to be able to get differentlevels of debt financing or they
want to be able to not have asmuch equity financing.
'cause again, as Rory noted, theequity is the highest risk,
highest return.
Your founders and, and kind ofthose folks, they, they have
that initial equity.
That's where the big up is.
You know, you can get 10 x.
(06:12):
Okay, great.
But the way you're getting 10 xmight be'cause you're using
financial leverage.
And that's the debt that'ssitting here.
And so.
might go, well, I got seniorsecured debt, and they might be
getting 6%.
And then if you need more money,the next people come in and go,
well, I, I can't be seniorsecured because you already have
someone in that position.
So I'll be a subordinate, youknow, kind of junior secured or
(06:32):
junior unsecured.
So I get paid next in thewaterfall, and so then I, you
know, but I'm gonna charge you9%.
And then you might get themezzanine where they go, okay,
I'm gonna charge you 12% pluswarrants.
So that way I get a littleequity play on this too.
emily-sander_1_05-15-2025_15 (06:47):
So that's the hybrid one, Rory
said.
So you're doing both credit andequity in that one.
ed-barton_1_05-15-2025_15 (06:51):
Yeah, there's normally an
squadcaster-gg3c_1_05-15-202 (06:52):
to
ed-barton_1_05-15-2025_1 (06:53):
equity option.
Yeah, there's normally an equity
squadcaster-gg3c_1_05-15-202 (06:55):
be in the, like the, the middle,
the meat in the sandwich
ed-barton_1_05-15-2025_1 (06:57):
that's where you wanna be.
where a lot of these private,private credit plays is in, is
in the mezzanine because you getthe, you get a good coupon,
which is basically yourpercentage interest rate that's
being charged on the debt.
Plus you've got equityparticipation or potential
equity participation.
'cause you could be, they'renormally warrants or options and
so.
(07:18):
If it doesn't work out, I can, Icould, know, I'm not gonna do
it.
And if it does, you know, then Iget when a company goes, goes
public or sells, I actually getadditional, I get additional
payment off of that transaction.
emily-sander_1_05-15-2025_1 (07:31):
Can you be in multiple layers at
once or,
ed-barton_1_05-15-2025_1536 (07:34):
Oh, yes.
emily-sander_1_05-15-2025 (07:34):
okay.
ed-barton_1_05-15-2025_15 (07:35):
yeah.
squadcaster-gg3c_1_05-15- (07:35):
yeah.
And I think you asked the rightquestion up top is, do some of
these firms participate in bothprivate credit and private
equity?
Absolutely, yes.
You look at like a, like Apolloor a Aries Management or a
Blackstone, they have a privateequity group.
They have a private creditgroup, probably have a special
situations mezzanine group,
ed-barton_1_05-15-2025_15 (07:55):
Yeah, I'm sure.
squadcaster-gg3c_1_05-15-2 (07:55):
Ed's point, you know, the reason that
you usually have a mezzanineslice of your capital stack is
because a need to have a littlebit more.
Equity than you have to access,like the debt that you need.
So if somebody comes in withthis little special situation,
slice of the sandwich and sitsin there with a nice position,
so
emily-sander_1_05-15-2025_ (08:15):
What does, what does that mean?
What you just said.
If we need more equity, we wannabe able to.
squadcaster-gg3c_1_05-15-2 (08:19):
like if I have, uh, if I, if I'm
looking for if much debt as Ican get, you know, a lender, a
private credit lender or a bank,uh, will, will lend up to a
certain.
Amount of what you required tomake an acquisition, let's say,
emily-sander_1_05-15-2025 (08:35):
Okay.
squadcaster-gg3c_1_05-15-20 (08:36):
um, that, you know, ed and I, and
the businesses that we've beenin together, that's usually
somewhere between 80 and 90% ofthe, need, well, let's say you
can only come up with enoughcash to get, get up to, you
know, 95% of the purchase price,right?
So you have, let's say, youknow, a million dollar portfolio
you wanna buy, you can get$800,000 of debt.
(08:59):
But in order to access that debtyou need.
200,000 of equity.
Well let, let's say you can onlycome up with, you know, a
hundred thousand dollars of likejust out of the back pocket of
your investors' wallet.
You may need somebody to come inand say, Hey, I'll come to the
rescue.
I'll be the additional a hundredthousand dollars and sit in
(09:19):
between you, the equity holderand the lender so that you can
access this debt.
of how it tends to work.
emily-sander_1_05-15-2025_1 (09:26):
Let me recap what I think.
I know there's a capital stackon top of the stack is credit
stuff.
squadcaster-gg3c_1_05-15-2 (09:34):
yes,
emily-sander_1_05-15-202 (09:34):
bottom of the stack is equity stuff.
squadcaster-gg3c_1_05-15-2 (09:37):
yes.
emily-sander_1_05-15-2025_1 (09:38):
the credit stuff is less risky, but
you get less return.
squadcaster-gg3c_1_05-15- (09:43):
Yeah.
emily-sander_1_05-15-202 (09:43):
equity stuff is more risky, but you get
more return and then you can,you can like plug and play at
different layers of this thing
squadcaster-gg3c_1_05-15- (09:50):
Yeah.
emily-sander_1_05-15-2 (09:51):
finance.
Okay.
squadcaster-gg3c_1_05-15- (09:52):
Yeah.
So you asked the question, youknow, like, what are some of
the.
Similarities between these two,know, private credit, credit,
private equity, a lot of it hasto come down to, the way these
funds are set up is verysimilar.
So you look at the investors inthese funds, limited partners,
they could be pension funds,endowments, uh, you know, all
(10:15):
sorts of sovereign wealth funds,et cetera.
It's just another alternativeasset class.
big, big funds have big LPs inboth private equity and, and.
Private credit.
Also, the compensation scheme'svery similar too.
you know, assets undermanagement that you'll earn as a
fund in private credit, and thesame as in private equity.
(10:36):
And there's a carried interestcomponent, which you'll earn in
both of those two.
So there's functionally verysimilar in how they're managed.
emily-sander_1_05-15-2025_15 (10:43):
if I'm an lp, why do I want PC
versus PE in any givensituation?
ed-barton_1_05-15-2025_15362 (10:49):
So pc PC is gonna give you
generally two things thatprivate equity is not.
So the first thing it's gonnagive you is steady cash flows.
squadcaster-gg3c_1_05-15-2 (10:57):
Yep.
emily-sander_1_05-15-2025_1 (10:58):
Ah,
ed-barton_1_05-15-2025_153 (10:59):
what you're gonna be, what you're
gonna have on a private creditsituation is you're gonna have
monthly or quarterly payments ofinterest or interest.
No, it's
emily-sander_1_05-15-2025_1 (11:06):
Oh.
ed-barton_1_05-15-2025_15362 (11:07):
in principle.
Returning.
And so your money is now, you'regonna have to put it back to
work, but you're getting aconstant stream of cash where
private equity, you might notsee cash for years until it
that, until that investmentflips.
So it's a, it's got a differentcash flow, uh, of.
Characteristic.
And then the other piece is froma risk perspective, you are
(11:29):
sitting kinda higher stack, andso it's less risky.
And as a result, you may have asituation where you're looking
at a, you're looking at acompany or, or you're a, you're
a.
Limited partner and you'regoing, look, I've got X amount
of equity exposure, I need somedebt exposure, uh, you know, to
kind of balance my portfolio.
But the debt I want isn't, Idon't want CDs, I don't want,
(11:50):
you know, kind of normalcorporate bonds.
I wanna be able to get, youknow, a higher rate of return
and maybe throw some equityjuice in there with the, with
warrants and some of
emily-sander_1_05-15-2025_15 (12:00):
I.
ed-barton_1_05-15-2025_15362 (12:01):
So I'm gonna play in this private
credit arena where I've got,yeah, where I've got some, where
I've got better cash flow, lowerrisk than, um, than on the
private equity side.
But I've got I've got highercash flow and higher risk than I
would if it was a traditionalbond or bank debt instrument.
emily-sander_1_05-15-2025_1 (12:24):
So, so to me that then largely
depends on what else is going onin that LPs world and, and that
portfolio.
So it might be like, I don'tknow, is there a.
Ratio of equity to credit, theyhave to hit or they prefer.
ed-barton_1_05-15-2025_1536 (12:41):
not normally.
Not normally.
think that, that actually couldbe a whole nother podcast is the
characteristics of LPs andbecause they, like, you're gonna
have some LPs, and I'll use anexample, like a, like a college,
uh.
Where they need to spin off cashevery year to help support the
(13:02):
college with,
squadcaster-gg3c_1_05-15- (13:03):
Asset liabilities management.
Yeah.
ed-barton_1_05-15-2025_ (13:05):
They've gotta be able to send cash to
the university every year theendowment does to be able to pay
for scholarships and you know,repairs to buildings and other
things.
And you may have others.
Others that are sitting theregoing, no, we don't need any
current income.
And so they're gonna, so ifyou've got one that is kind of
leaning more toward, I've gottahave some current period income
pensions.
(13:26):
Tend to need current periodincome insurance companies tend
to need current period incomeactuarially.
squadcaster-gg3c_1_05-15-2 (13:31):
Yep.
ed-barton_1_05-15-2025_153 (13:32):
need to structure their portfolio in
such a way that part of thatportfolio is spitting off cash.
So that's where they would go,yeah, I'll allocate some to a
debt instrument where theprobability of that cash and a
predictability of that cash ismuch higher.
And then the rest of it I can islonger term and I can push that
off and be less liquid.
squadcaster-gg3c_1_05-15- (13:49):
Yeah, I mean, the other way to think
about it, uh, for just personkind of applying it to their own
lives, it's no, no different atall than kind of going to your.
You know, your financialadvisor, Raymond James person,
whatever, overpriced wealthmanager, whatever that may be,
and just be like, they tell you,well, you should have a
portfolio of a bro.
How old are you?
What are your obligations?
(14:09):
Okay, you're
emily-sander_1_05-15-2025 (14:10):
Yeah.
squadcaster-gg3c_1_05-15-202 (14:10):
so maybe you should have 60% in
stocks, 40% or 60% equity, 40%fixed income.
it's, it's no different.
You know, you're just allocatingof magnitude, larger sums, but
it really comes down to a fixedincome strategy and an equity
strategy.
kind of blending those togetherand making from a risk return
(14:31):
standpoint.
emily-sander_1_05-15-2025 (14:31):
Yeah, and I'll sound fancy'cause this
is true.
Yesterday I was talking to aultra high net worth individual
and she was looking for, she hada VC firm where she was
investing in Port Coast, but shewas also looking to be an LP for
VC and PE firms.
and so she was like, look, I, Ihave cash to spend.
She had certain things shewanted to hit in terms of.
(14:52):
Mission and, uh, the impact inthe world and certain things
like that.
But, she was, look, she waslooking for good places to, to
invest her money.
squadcaster-gg3c_1_ (15:02):
absolutely.
And you know, that's, youtouched on a nice little subject
there, and so you know, the sameas how we've talked about in our
book and on this podcast.
What's the difference between.
You know, uh, venture capitalequity plays and private equity
plays, you know, there's earlystage more risky and the venture
less risky.
(15:22):
On the equity side, the samething occurs on the private
credit side too.
So there's, you know, venturedebt funds out there and there's
ven, you know, private creditfunds that are act more like
equity.
Uh.
in so far as like the types ofcompanies in the life stage that
they're at.
I work for a startup, you know,myself, and we talk more to VCs
(15:43):
and venture debt providers thanI talk to around private equity
and private credit today.
You know, it's just a major oflike risk at the end of the day
and, uh, and where a company'sat as far as their, their
lifecycle's concerned, you know,so.
two sides of the same coin, ifyou will, just to kind of put a,
you a button on that.
(16:04):
Um, but there's just somedistinct differences on, as, as
we talked about, that riskreturn profile.
And a lot of times these twoentities or these two asset
classes work together.
Like if it, you know, a privateequity group, uh, is buying a
company, they need, they needleverage to, to make that
acquisition.
(16:24):
You know, if, if they can't getas attractive at terms.
As they want with, you know, oneof the big banks out there,
private credit is right there tolock arms with them and do a
deal.
And oftentimes they do a deal inthe, in the early part of it,
and then quickly get refied out.
Once,
emily-sander_1_05-15-2025_1 (16:40):
Oh.
squadcaster-gg3c_1_05-15-2 (16:41):
once the company they're buyings hit
a certain threshold where theycan support, you know, bank debt
and stuff like that.
emily-sander_1_05-15-2025 (16:47):
Okay, so gimme an example.
If I'm like a pe we're a PEfirm.
and the market conditions aresuch as they are.
We talked about this last time,so I don't know if this affects
it, where it's like, oh, in thismarket condition, we want more
of this.
can you run me through ascenario where we would want to
be in multiple layers of thatcap stack,
ed-barton_1_05-15-2025_15 (17:05):
Yeah, I can give you, I can give you
one kind of out the gate, whichis, as you, if you're investing
in a business, you may come inas a.
As preferred equity, forinstance.
And that business is kind ofcranking along.
It might be doing fine, but it'snot performing the way you
anticipated and they need someadditional cash.
squadcaster-gg3c_1_05-15- (17:26):
Yeah.
ed-barton_1_05-15-2025_1536 (17:27):
Um, and so you go, okay, instead of
putting in more private, morepreferred equity, I'm gonna put
in mezzanine debt.
I'm gonna basically put in somedebt.
So I'm gonna get some cash out.
'cause you, they probably can'tgo to a bank or we don't want to
go to a bank because, you know,we're in a.
Either covenants or somethingalong those lines where we
can't.
squadcaster-gg3c_1_05-15- (17:46):
Yeah.
ed-barton_1_05-15-2025_15362 (17:47):
as a private equity firm, instead
of going, I'm gonna give youmore equity, they go, no, I'm
gonna give you a Mez debt andI'm going to kind of charge you
14% interest and I'm gonna takeanother 10% of equity as a in
warrants.
And that way I'm more protected.
I've kind of, I've kind of puta.
against my other equityinvestment, so I get paid first
(18:09):
I'll get that money out.
So if it essentially crams downmore on the, on the common
squadcaster-gg3c_1_05-15- (18:15):
Yeah.
emily-sander_1_05-15-2025 (18:16):
Okay.
Gonna switch tenses.
We're no longer the PE firm,we're just podcast people
talking about this.
So if the PE firm, you saidthey, the PE firm, uh, they were
charging 14%.
Like to whom?
ed-barton_1_05-15-2025_15362 (18:29):
to their portfolio company.
emily-sander_1_05-15-2025 (18:31):
Okay.
So they're adding, they'resaying you're not performing
well.
So, and we don't wanna stroke acheck and, or we can't take out
a further bank loan.
ed-barton_1_05-15-2025_ (18:39):
they're stroking a check.
They're just going, the checkwe're stroking is now debt, not
more equity, and you have tostart paying us back right away.
emily-sander_1_05-15-2025_1 (18:46):
Oh.
ed-barton_1_05-15-2025_153 (18:46):
And, and we're gonna charge you
interest and we're gonna passthat through to the LPs and
you're gonna give us more equityfounder because you haven't
quite performed the way weexpected.
And, but we think you will.
But we're not gonna, but the waywe're gonna put in more money is
in a.
Higher on the capital stackposition that's gonna get us
cash flow.
Now
squadcaster-gg3c_1_05-15-2025 (19:06):
I see that a lot too.
I mean, it's just another formof a bridge loan, you know, in,
in a company that needs it, youknow?
And a lot of these cases, youknow, you ask the question,
well, why would, why wouldsomebody ever.
Work with private credit ormezzanine lenders when they
could, maybe they could go getbank debt.
Well,
ed-barton_1_05-15-2025_153 (19:21):
they probably can't.
squadcaster-gg3c_1_05-15- (19:23):
Yeah, they probably can't.
And banks move slow banks areoften a lot more regulated,
which means their appetite forrisk changes from time to time.
Right.
so one thing that's consistentis the private credit market is
a lot less regulated.
There's more flexibility instructuring because they're
non-depository institutions thathave.
Very specific capitalrequirements and things like
(19:44):
that.
There's a whole line of reasonswhy there is a whole, there is
in fact a private credit marketthat exists to be basically an
alternative to banks.
Because if, if, if the banksruled the world entirely, there
wouldn't be a private creditmarket.
But there sure is because ofsome of the challenges that
banks have and folks have withworking with banks from time to
time, you know,
emily-sander_1_05-15-2025_1 (20:05):
Can we put some numbers to this?
So we talked about privateequity was like, I think it was
like 7.5 trillion and privatecredit was significantly less,
like 1.7 trillion, but stillwe're talking like trillions
with a T.
squadcaster-gg3c_1_05-15-20 (20:16):
And I, I saw, I read a stat today
even that's, by 2032, it's gonnabe well over 10 trillion on both
sides.
So private credit is probablygrowing faster right now than
private equity.
But private equity still isnominally bigger only because.
The credit market, let's justsay the fixed income market
(20:38):
globally is many multiplesbigger than the equities market.
But there's publicsecuritizations, there's bond,
public bond offerings, there'sbank debt, there's, there's,
that means that like the biggerslices of the overall credit
market, there's already bigplayers in there, private credit
represents a, a large andgrowing proportion of all of
(20:59):
that.
So if you will, the.
The pie is getting bigger ofcredit, but also the size of the
pie with private credits gettingbigger as it becomes more
viable, all of those things.
emily-sander_1_05-15-202 (21:11):
what's the name of a private credit
company?
squadcaster-gg3c_1_05-15- (21:16):
Gosh, I could name a, a lot of, um,
Blackstone's got a privatecredit strategy.
Apollo, Aries, I mean there's awhole, there's whole so many.
I mean, I have a private.
Investment business thatacquires consumer bankruptcy
debt that could be consideredboth a private equity fund and a
private credit
emily-sander_1_05-15-2025_1 (21:35):
Oh.
squadcaster-gg3c_1_05-15- (21:35):
which way you slice it.
So
ed-barton_1_05-15-2025_ (21:36):
Mm-hmm.
squadcaster-gg3c_1_05-15-202 (21:36):
is just a term that means you're
providing debt in a privatemarket.
So it could be a million dollarfund, it could be a, you know,
billion fund.
Same thing
emily-sander_1_05-15-2025_15 (21:47):
Is it kind of like a bank has
different divisions of the bankthat do very different things,
but they're all part of the samebank
squadcaster-gg3c_1_05-15-20 (21:53):
for the big funds.
Absolutely.
emily-sander_1_05-15-2025_ (21:54):
ish.
Okay.
Okay.
squadcaster-gg3c_1_05-15- (21:56):
Yeah.
ed-barton_1_05-15-2025_15 (21:56):
Well, and and what's interesting is
this private credit market, someof the banks have tried to get
into it.
SVB, Silicon Valley Bank wasextraordinarily successful for a
long time.
And working the fringes of thismarket and going, Hey, we're
gonna loan, they're gonna bekind of with sponsor finance.
So they had a sponsor financegroup and they would kinda work
with private equity to providethe debt.
(22:18):
Um, they would get fundguarantees, they would get, you
know, participations, they'dget.
You know, all the, that kind ofstuff.
And they, they were like thebank lender that played in this
space.
The problem was they, when theyfailed, they didn't fail.
'cause they weren't profitable.
They failed because they weren'tliquid.
squadcaster-gg3c_1_05-1 (22:32):
Mm-hmm.
ed-barton_1_05-15-2025 (22:33):
couldn't get, they, there was a kind of
run on deposits.
They couldn't get the, theycouldn't get these loans to, you
know, you can't sell'em on asecondary market.
They don't, you know, they, theyare performing, but you know,
you have to get certain level ofliquidity and they're illiquid
relative to normal bank debt.
emily-sander_1_05-15-2025_15 (22:50):
So are you locked in for a
duration?
ed-barton_1_05-15-2025_1536 (22:53):
Uh, it there.
So in a lot of cases, if you'rein a, if you're in a bank
environment, um, traditional,uh, depository institution, bank
environment, there, there.
Regulated by both federalregulation, international
regulations, so like Basel Baseltoo, which is, you know, kind of
here's what your risks need tolook like.
And they can sell and do sellloans across, like, and they
(23:15):
sell participation in loans and,you know, so they, they don't
hold all this stuff on theirbooks, securitize it, which, you
know, Rory was talking about.
So ones with certain types will
squadcaster-gg3c_1_05-15- (23:24):
Yeah, pull it up.
ed-barton_1_05-15-2025_1536 (23:25):
the market.
A lot of these private, privatecredit, um, type loans.
They're so bespoke as far as theterms and conditions and what
they're kind of, what,sweeteners are in'em and those
kind of things that they, thatyou can't securitize'em and they
don't tend to play withparticipation and they don't fit
in the Basel two type, uh, uh,credit And so when you, when if
(23:51):
you want someone else to play,it's normally gotta be another
private credit fund.
You can't just kind of go outand go, well, banks, you know,
why don't you wanna play inthis, in this pool?
squadcaster-gg3c_1_05-15- (24:00):
Yeah.
ed-barton_1_05-15-2025_1536 (24:01):
And so it's a, it's a different,
it's a different animal.
emily-sander_1_05-15-2025_15 (24:04):
So if there's a run on the private
credit, there's nowhere for themto turn to try to get.
ed-barton_1_05-15-2025_1536 (24:08):
the thing is with private credit,
there is no run because privatecredit's not a depository
institution with a bank.
The depository institution likeSilicon Valley Bank, the loans
on this side, on the, on theasset side of the balance sheet
are offset by deposits.
On the liability side of thebalance sheet.
And so if all of a sudden peoplewant a bunch of depo, want their
de their money back fordeposits, bank has to pay cash.
(24:30):
Well, the only way to get cashis you have reserves and then
you've got the, the loans andthey can't, it's tough to bundle
those loans up and sell'em theydon't fit the, they don't fit
these buckets nicely.
squadcaster-gg3c_1_05-15- (24:41):
Yeah, and that's why banks are
governed.
The way they are so heavily isso that can be avoided at at the
highest possible way, which iswhy you don't like relatively.
see a lot of runs on bankdeposits and, and bank failures.
I think the one was, was kind ofunique by, by virtue of the
specialization, ed talked about,you know, you'll, you'll never
(25:03):
see.
mean, you'll never, you're nevergonna see a Bank of America
fail.
I mean, it, it just, it's notgonna happen because of the, all
of the regulation around that.
Uh, and also just, you know,they'll get propped up.
ed-barton_1_05-15-2025_1 (25:15):
Right.
Yeah.
squadcaster-gg3c_1_05-15-20 (25:16):
SDB was kind of propped up even
ed-barton_1_05-15-2025_ (25:18):
Mm-hmm.
squadcaster-gg3c_1_05-15-202 (25:18):
to go down that hole.
I mean, they were packaged upand sold to, I think first
Citizens.
but anyway, point being is theilliquidity aspect of the
private.
Equity in private credit marketspresents more risk and therefore
more return.
But there's, you know, you knowthe return's not guaranteed.
Let's just say it that way.
emily-sander_1_05-15-2025_ (25:39):
Then if we're talking like numbers,
what, so first of all, we talkedabout the characteristics.
So for private credit, you'regetting paid out monthly, not
dividends.
What was the word you used?
Interest.
Interest.
'cause
ed-barton_1_05-15-2025_15 (25:49):
gonna be in principle.
emily-sander_1_05-15-2 (25:51):
interest to principle.
Okay, so those are paid out andboom.
Like slow drip, slow drip, slowdrip every month.
The private equity is a big slugat the end if you do well.
Yes.
squadcaster-gg3c_1_05-15- (26:01):
Yeah.
ed-barton_1_05-15-2025_1 (26:02):
that's a good generalization.
It's not.
That's
emily-sander_1_05-15-2025 (26:05):
Fair.
ed-barton_1_05-15-2025_15 (26:05):
every situation's
emily-sander_1_05-15-2025 (26:06):
Sure.
Broad strokes.
And then for the private credit,is there something at the end or
is it just the slow drip?
ed-barton_1_05-15-2025_15 (26:13):
Yeah, there could be.
If there were warrants attachedto it,
emily-sander_1_05-15-2025 (26:15):
Okay.
ed-barton_1_05-15-2025_15 (26:15):
there could very well be equity that,
that, that kind of converts intoequity.
And so when the companytransacts, they end up with
another slug or, you know, butthat's general, that's generally
gonna look like a warrant or a,an option.
squadcaster-gg3c_1_05-15-20 (26:30):
But yeah, put some numbers behind it
though.
Think about maybe I.
Your typical private equityreturn profile is probably twice
what the private credit returnprofile is.
So you might be looking at a 15to 25% of return expectation on
private equity, somewherebetween seven and 12% on average
on
emily-sander_1_05-15-2025 (26:49):
Okay.
squadcaster-gg3c_1_0 (26:50):
reflecting that risk differential.
emily-sander_1_05-15-2025 (26:52):
Okay.
Um, this might be a sillyquestion, but.
Is it like a hedge situation?
So if the company does well, thecredit does less well, or is it
like No.
If the company does well, bothof those ships rise
ed-barton_1_05-15-2025_1536 (27:03):
Um, with, with private credit,
especially mezzanine structured,ships rise but normally your
equity ship rises higher
emily-sander_1_05-15-20 (27:12):
higher.
Okay.
ed-barton_1_05-15-2025_1536 (27:14):
Um, but the, but the debt gets paid
off and normally there was some,know, a sweetener or something
in there where they get a, wherethey get some juice at the end
too.
squadcaster-gg3c_1_05 (27:23):
generally speaking, the company does well,
you know, um, all sort of partsof the capital stack generally
do well.
I mean,
emily-sander_1_05-15-2025 (27:32):
Okay.
squadcaster-gg3c_1_05-15-20 (27:32):
the point.
Now, if it gets, it's on themiddle ground where it's does
okay, but not great, that meansthat.
Probably the lender's gonna dojust fine, but maybe the
equity's not gonna be doingquite as good.
Right.
So you could find scenarioswhere maybe the relative
ed-barton_1_05-15-2025_153 (27:46):
Yep.
No, very much so.
Yeah.
emily-sander_1_05-15-2025_ (27:48):
Hmm.
squadcaster-gg3c_1_05-15-2 (27:48):
I've been part of businesses like
that.
I
emily-sander_1_05-15-2025 (27:50):
Yeah, and this is also where it ties
into our previous episodes whereit's like that initial
negotiation of where you fall inthe waterfall and when you get
paid out can make night and daydifference.
ed-barton_1_05-15-2025_153 (28:01):
Yep.
squadcaster-gg3c_1_05-15-2 (28:02):
both initial negotiation, but also
continued negotiation as thecompany evolves.
you know, as Ed and I haveworked together on some of these
deals literally over the, likelast 15, 20 years, it's like,
know, there's a lot of times inwhich you restructure a business
and you're, you're renegotiatingthe positions of all the capital
providers in, in that stack, youknow, multiple times over the
(28:24):
life cycle of a business.
It's, that's how it goes.
emily-sander_1_05-15-2025_15 (28:27):
Is there an equivalent of like when
you hear about diluting equityor splitting shares, is there an
equivalent for the credit side?
squadcaster-gg3c_1_05-15-2 (28:34):
Hmm.
Good question.
Hmm.
emily-sander_1_05-15-2025_ (28:39):
Both of them.
ed-barton_1_05-15-2025_1536 (28:40):
Not really.
I mean, what, what, what you endup, what you end up, because
it's not like shares to dilute.
It's basically what could happenis you end up with a s with
someone who's in a Mez position,and then they add additional
senior debt above you.
And normally there's arestriction.
Mez folks will put restrictionson kind of how far they can get
buried in the cap stack,
emily-sander_1_05-15-2025 (29:02):
Yeah.
ed-barton_1_05-15-2025 (29:02):
Normally that's gonna end up being a, you
know, if you have a, a formalrestructuring or a receivership
or a bankruptcy, that's where,you know, you get the pennies on
a dollar.
squadcaster-gg3c_1_05-15- (29:13):
Well, yeah.
ed-barton_1_05-15-2025_153 (29:13):
The, the, the Mez folks may get, you
know, the, the senior securedmay get fully paid.
squadcaster-gg3c_1_05-15- (29:18):
Yeah.
ed-barton_1_05-15-2025_15 (29:19):
folks may get 40 cents, 30 cents, 10
cents on a dollar equity getsnothing.
squadcaster-gg3c_1_05-15 (29:23):
Right.
to the, to the, maybe the ofyour question too was around,
hey, you, no matter whatposition that you're in, in the
cable stack, can you.
Can you, can you see your returnkind of be diminished?
The answer to that is yes.
And like on, even on, eventhough it's not share based in,
in the debt side, credit part ofit, I've, I've been the, uh,
(29:46):
cause of this, uh, in otherbusinesses where, you know, you,
you do all this work with alender to put a facility in
place.
And the markets move and you'reable to refi that debt out, you
can kind of screw the lenderbecause they went into it with
the intention, like, I'm gonnaget, uh, a rate of return of,
you know, 12%.
But if you refi that out, yeah,sure, you're paying back all the
(30:08):
principle, but you do itquickly, they're not gonna get a
12% return.
It'll be much less than that.
So it's, that's, and it justlike it is in the, you know,
personal mortgage industry.
Right.
Or like, you know, constantlyfinding better rates and you're
trying to.
You know, get the best deal foryourself.
Well, you, you know, every timeyou do that, know, unless
there's specific structure inplace where returns kind of
(30:29):
guaranteed, which in a lot ofcases that is how it works.
You know, that lender can, cankind of screwed for all the
time, effort, and energy, andeven risk that they put into it,
but then they don't get thereturn from all of that.
ed-barton_1_05-15-2025_153 (30:40):
I'll give a, I'll give a real world
example, and Emily, you real,you probably weren't aware of
this, but the last company weworked together at, we had
seniors, senior debt, um,provided by Silicon Valley Bank.
We did an acquisition, theseller did seller financed debt.
Which had to subordinate to,
emily-sander_1_05-15-2025_1 (31:01):
Oh.
ed-barton_1_05-15-2025_ (31:01):
Silicon Valley Bank, and so they had a
higher interest rate and we weremaking the payments.
But when Covid hit, we flunkedcovenants.
emily-sander_1_05-15-2025_153 (31:10):
I remember that.
ed-barton_1_05-15-2025_1536 (31:11):
and so, Silicon Valley Bank said,
um, you will no longer makepayments to your junior, to
your, to the, to thesubordinated debt.
And so we had to stop makingpayments.
We had to stand still that,that, those debt payments.
And so that was one.
squadcaster-gg3c_1_05-15-2025 (31:25):
a perfect example.
ed-barton_1_05-15-2025_15 (31:26):
Where they were like, wait a second,
what do you mean you're stoppingthe, the debt payments?
And we're like, sorry.
The, the senior, the seniorlender has a provision where if
we trip to covenants, you don'tget paid until we're back into
compliance.
And so.
squadcaster-gg3c_1_05-15- (31:41):
Yeah.
emily-sander_1_05-15-2025_1 (31:42):
You gotta read the fine print.
ed-barton_1_05-15-2025_15 (31:44):
Well, and, and there's not, yeah, you
do, but it's also understandwhere you're at
emily-sander_1_05-15-2025 (31:48):
Yeah.
ed-barton_1_05-15-2025_15 (31:49):
stack and you can get kind of
disintermediated temporarily orpermanently, depending on kind
of what it looks like.
But that's one where it was atemporary, they ended up getting
made whole at the end, um, whena company sold.
But until then, it was, youknow, you're getting some of it.
You're getting none of it.
You're getting, you know, this,this quarter you're fine.
(32:09):
Next quarter you're not.
And they were in a subordinatedposition,
emily-sander_1_05-15-2025_1 (32:14):
All right.
Final thoughts, takeaways forour listeners?
Private cap.
ed-barton_1_05-15-2025_1536 (32:20):
so, so private.
So the on a private debt side,um.
You know, you had mentionedthere's more money flowing into
there now, and the reason, partof the reason for that is as you
have uncertainty, wanna reducethe risk.
And so that beco makes it moreattractive.
You go higher on the cap stack,you're better, you're more
likely to get repaid.
The cash flows are a little bitmore predictable.
squadcaster-gg3c_1_05-15-2 (32:41):
Hmm.
ed-barton_1_05-15-2025_1536 (32:41):
Um, you're willing to take.
The, the market itself isriskier, so you're shifting your
asset class a little bit bytaking less risk in that asset
class by shifting over from a,from equity to debt.
And it's a really useful, ittruly is a really useful and
probably underutilized, um,tool.
A lot of founders, I think,probably would've been better
(33:02):
served to look at a private debtplacement.
squadcaster-gg3c_1_05-15 (33:05):
that's a good
ed-barton_1_05-15-2025_1 (33:06):
Rather than private equity where
they're selling off, wherethey're selling off ownership,
you get less, less dilution.
And while it might feel a littlebit worse, um, at the end of the
day you, you're gonna end uphaving a much higher upside, you
know, I.
squadcaster-gg3c_1_05-15-202 (33:20):
of that big time in, uh, you know,
in the venture world where,where venture debt is a thing
where you get your firstinstitutional round of equity,
you layer on some, you basicallytake less equity, more venture
debt.
Venture debt wants to come inwith an institutional investor
you don't dilute yourself asmuch.
So, yeah, I just, I think thatlike some of the ones that Ed
(33:41):
and I have worked for.
Where they don't go through thatventure debt round, they just
kind of go through bootstrap.
From bootstrap to private equityis Ted's point, should consider
the private credit route inconjunction with any private
equity that's, uh, you know,considered.
So yeah, I mean there's myriadof things and I think the only
thing we wanted to take away,one of the things we wanted take
(34:01):
away is.
what does this term mean?
You hear it thrown around somuch these days, but it's not
something that's new.
It's just something that isfocused on now.
And you know, hopefully we'vedemystified it a little bit the
same way we've done that withprivate equity, uh, as an asset
class.
emily-sander_1_05-15-2025 (34:18):
Yeah, so dear listener, now you know
what PC stands for.
You know about the debt side,you know that being
disintermediated is bad.
You know that being in the midmezzanine level is good for both
cap stacks and theater viewingand.
You can join us next time forthe next round of the risk
Premium drinking game here onthe.
squadcaster-gg3c_1_05-15-20 (34:40):
go.
Let's go.
Yep.
I can't wait.
We are back with the private equity
experience and today we areadding a new acronym to the Mix
pc,
squadcaster-gg3c_1_05 (00:41):
goodness.
emily-sander_1_05-15-2025_1 (00:42):
not your computer, not PC versus
Mac.
It is
squadcaster-gg3c_1_05-1 (00:46):
correct
emily-sander_1_05-15-2025_1 (00:47):
not politically correct.
That's not this podcast at all.
Um, we're talking private creditand private equity.
How these are different and howthey frequently go together.
squadcaster-gg3c_1_05-15- (00:59):
Yeah.
emily-sander_1_05-15-2025_1 (01:01):
Who wants?
squadcaster-gg3c_1_0 (01:01):
frequently do.
emily-sander_1_05-15-2025_ (01:02):
Yes.
Okay.
Who wants to start with the,like what, what, what is private
credit?
You just talked about privateequity.
What is private credit?
squadcaster-gg3c_1_05-15-2 (01:10):
I'll start by saying it's a, it's a
term that you hear a lot morenow than you did.
Say 10 years ago.
But the fact is it's not a new,it's not a new phenomenon.
I mean, ed and I have beenworking with private credit
partners for damn near 20 yearsnow.
Uh, it's taken on a little bitmore of a, um, you know, a
terminology position in themarket as a separation from
(01:32):
basically, accessing debtfinancing through banks and
other, you know, income markets.
But in the, in the name, it's,it's implied, it's private.
It's a private, it's a private.
Market access to debt, uh, goesalongside private equity.
There's some similarities andyou know, a few differences too.
emily-sander_1_05-15-2025 (01:53):
Wait, so Okay.
It's private, meaning it's noton like a public trade, publicly
traded, um, market.
It's credit, which is like debt.
It reminds me of like a creditcard debt.
Is that
squadcaster-gg3c_1_05-15- (02:07):
yeah.
emily-sander_1_05-15-2025 (02:07):
size?
squadcaster-gg3c_1_05-15-2025 (02:07):
I mean, there are some, there are
some large firms, just likethere are some large private
equity firms that.
their shares in public markets.
But what what it really means isyou're a private sector access
to financing for your businessor your assets.
emily-sander_1_05-15-2025 (02:27):
Okay.
What would, um.
We have some similar playersthough, right?
Like we're still talking like,uh, LPs or whatever that's
called on the PC side, we'retalking like endowments and
insurance companies.
And those are the same peoplefunding pc.
Right.
Okay.
And then like what's differentabout like the whole times or
(02:49):
like the, or is it more, is itmore or less risky than private
equity?
Like what are we talking abouthere?
squadcaster-gg3c_1_05-15- (02:54):
place to
ed-barton_1_05-15-2025_15 (02:54):
Great
squadcaster-gg3c_1_05-15- (02:54):
Risk.
Risk.
And I'll just kick it off and Edcan wonk it out.
'cause this is, this is Ed.
I just, I'll just sit back andlisten to Ed, but, but yeah,
remember everybody that.
You know, when you look at acapital structure, there's
levels of risk generallyspeaking to different levels in
your capital structure.
Otherwise, as we say in ourbook, the capital stack, so on
(03:15):
the on the top end, lowest riskis your senior lenders.
Because you have other folksbelow that that take the first
hit before, um, before anythinghappens with, with that senior
de position.
Then below that you havepotentially mezzanine uh, debt,
which is sort of a, if you wantto think about it really simply,
it's kind of like a hybridbetween debt and equity.
(03:37):
And then lastly, you haveequity, which is at the bottom
of the capital stack representsthe highest risk, but also the
highest return.
And so that's the basics.
Ed can walk it out from there.
Probably sprinkle in riskpremium in terms of that, uh.
In terms of that description,
ed-barton_1_05-15-2025_15 (03:52):
Yeah.
So at each, at each one ofthose, let's call it three basic
levels.
So you've got your and, and eachone of these components breaks
into a bunch of sub-components.
So you could have
squadcaster-gg3c_1_05-15-2 (04:02):
yes.
ed-barton_1_05-15-2025 (04:03):
secured, senior unsecured, junior
secured, junior unsecured.
Specific secured, and then youcould have unsecured mezzanine,
and then you could havemezzanine with participation.
And then you can have preferredequity and equity.
And
squadcaster-gg3c_1_05-15- (04:16):
Yeah.
ed-barton_1_05-15-2025_1536 (04:17):
the capital stack could look like,
like a rainbow a, a financingrainbow with all sorts of
different colors of stuff inthere.
So
emily-sander_1_05-15-2025_1 (04:27):
Do,
ed-barton_1_05-15-2025_1536 (04:27):
uh.
emily-sander_1_05-15-2025_1 (04:27):
you wanna briefly explain like, the
function, like why there's,there's different, not, not each
specific one.
We were like in high school fora while with like senior and
junior, and then we moved tolike secure, insecure, like,
like just generally speaking.
What are all those things youmentioned?
I.
ed-barton_1_05-15-2025_1536 (04:40):
So, so generally speaking, each one
of them has a different riskpremium associated with them.
so the
squadcaster-gg3c_1_05-15-202 (04:48):
we go.
ed-barton_1_05-15-2025_1536 (04:48):
the one that's at the top, so senior
secured essentially says, look,this is, we get paid first.
So anything happens with abusiness, we get paid first.
And.
Our position, our debt is alsosecured by something specific.
So it's not just a general debtof the business.
It may be secured by patents, itmay be secured by inventory, it
(05:10):
may be secured by real estate.
It may be, so not only do wehave the, we get paid first if
anything happens, but we alsohave a security interest in
assets that we can seize that noone else can use to get paid.
emily-sander_1_05-15-2025_15 (05:26):
Is it like a lien on a house or
like a HELOC loan on a.
ed-barton_1_05-15-2025 (05:29):
exactly.
So, so your, your first mortgageon your house is your senior
secured.
Then if you have a heloc,they're gonna be a junior
secured they're behind, they'rebehind the, the senior secured
but they're still secured by thehouse.
But the first position gets paidoff first before the next one
does.
squadcaster-gg3c_1_05-1 (05:49):
Mm-hmm.
ed-barton_1_05-15-2025_1 (05:50):
Right.
Each, each one of thosecompanies use those because they
want to be able to get differentlevels of debt financing or they
want to be able to not have asmuch equity financing.
'cause again, as Rory noted, theequity is the highest risk,
highest return.
Your founders and, and kind ofthose folks, they, they have
that initial equity.
That's where the big up is.
You know, you can get 10 x.
(06:12):
Okay, great.
But the way you're getting 10 xmight be'cause you're using
financial leverage.
And that's the debt that'ssitting here.
And so.
might go, well, I got seniorsecured debt, and they might be
getting 6%.
And then if you need more money,the next people come in and go,
well, I, I can't be seniorsecured because you already have
someone in that position.
So I'll be a subordinate, youknow, kind of junior secured or
(06:32):
junior unsecured.
So I get paid next in thewaterfall, and so then I, you
know, but I'm gonna charge you9%.
And then you might get themezzanine where they go, okay,
I'm gonna charge you 12% pluswarrants.
So that way I get a littleequity play on this too.
emily-sander_1_05-15-2025_15 (06:47):
So that's the hybrid one, Rory
said.
So you're doing both credit andequity in that one.
ed-barton_1_05-15-2025_15 (06:51):
Yeah, there's normally an
squadcaster-gg3c_1_05-15-202 (06:52):
to
ed-barton_1_05-15-2025_1 (06:53):
equity option.
Yeah, there's normally an equity
squadcaster-gg3c_1_05-15-202 (06:55):
be in the, like the, the middle,
the meat in the sandwich
ed-barton_1_05-15-2025_1 (06:57):
that's where you wanna be.
where a lot of these private,private credit plays is in, is
in the mezzanine because you getthe, you get a good coupon,
which is basically yourpercentage interest rate that's
being charged on the debt.
Plus you've got equityparticipation or potential
equity participation.
'cause you could be, they'renormally warrants or options and
so.
(07:18):
If it doesn't work out, I can, Icould, know, I'm not gonna do
it.
And if it does, you know, then Iget when a company goes, goes
public or sells, I actually getadditional, I get additional
payment off of that transaction.
emily-sander_1_05-15-2025_1 (07:31):
Can you be in multiple layers at
once or,
ed-barton_1_05-15-2025_1536 (07:34):
Oh, yes.
emily-sander_1_05-15-2025 (07:34):
okay.
ed-barton_1_05-15-2025_15 (07:35):
yeah.
squadcaster-gg3c_1_05-15- (07:35):
yeah.
And I think you asked the rightquestion up top is, do some of
these firms participate in bothprivate credit and private
equity?
Absolutely, yes.
You look at like a, like Apolloor a Aries Management or a
Blackstone, they have a privateequity group.
They have a private creditgroup, probably have a special
situations mezzanine group,
ed-barton_1_05-15-2025_15 (07:55):
Yeah, I'm sure.
squadcaster-gg3c_1_05-15-2 (07:55):
Ed's point, you know, the reason that
you usually have a mezzanineslice of your capital stack is
because a need to have a littlebit more.
Equity than you have to access,like the debt that you need.
So if somebody comes in withthis little special situation,
slice of the sandwich and sitsin there with a nice position,
so
emily-sander_1_05-15-2025_ (08:15):
What does, what does that mean?
What you just said.
If we need more equity, we wannabe able to.
squadcaster-gg3c_1_05-15-2 (08:19):
like if I have, uh, if I, if I'm
looking for if much debt as Ican get, you know, a lender, a
private credit lender or a bank,uh, will, will lend up to a
certain.
Amount of what you required tomake an acquisition, let's say,
emily-sander_1_05-15-2025 (08:35):
Okay.
squadcaster-gg3c_1_05-15-20 (08:36):
um, that, you know, ed and I, and
the businesses that we've beenin together, that's usually
somewhere between 80 and 90% ofthe, need, well, let's say you
can only come up with enoughcash to get, get up to, you
know, 95% of the purchase price,right?
So you have, let's say, youknow, a million dollar portfolio
you wanna buy, you can get$800,000 of debt.
(08:59):
But in order to access that debtyou need.
200,000 of equity.
Well let, let's say you can onlycome up with, you know, a
hundred thousand dollars of likejust out of the back pocket of
your investors' wallet.
You may need somebody to come inand say, Hey, I'll come to the
rescue.
I'll be the additional a hundredthousand dollars and sit in
(09:19):
between you, the equity holderand the lender so that you can
access this debt.
of how it tends to work.
emily-sander_1_05-15-2025_1 (09:26):
Let me recap what I think.
I know there's a capital stackon top of the stack is credit
stuff.
squadcaster-gg3c_1_05-15-2 (09:34):
yes,
emily-sander_1_05-15-202 (09:34):
bottom of the stack is equity stuff.
squadcaster-gg3c_1_05-15-2 (09:37):
yes.
emily-sander_1_05-15-2025_1 (09:38):
the credit stuff is less risky, but
you get less return.
squadcaster-gg3c_1_05-15- (09:43):
Yeah.
emily-sander_1_05-15-202 (09:43):
equity stuff is more risky, but you get
more return and then you can,you can like plug and play at
different layers of this thing
squadcaster-gg3c_1_05-15- (09:50):
Yeah.
emily-sander_1_05-15-2 (09:51):
finance.
Okay.
squadcaster-gg3c_1_05-15- (09:52):
Yeah.
So you asked the question, youknow, like, what are some of
the.
Similarities between these two,know, private credit, credit,
private equity, a lot of it hasto come down to, the way these
funds are set up is verysimilar.
So you look at the investors inthese funds, limited partners,
they could be pension funds,endowments, uh, you know, all
(10:15):
sorts of sovereign wealth funds,et cetera.
It's just another alternativeasset class.
big, big funds have big LPs inboth private equity and, and.
Private credit.
Also, the compensation scheme'svery similar too.
you know, assets undermanagement that you'll earn as a
fund in private credit, and thesame as in private equity.
(10:36):
And there's a carried interestcomponent, which you'll earn in
both of those two.
So there's functionally verysimilar in how they're managed.
emily-sander_1_05-15-2025_15 (10:43):
if I'm an lp, why do I want PC
versus PE in any givensituation?
ed-barton_1_05-15-2025_15362 (10:49):
So pc PC is gonna give you
generally two things thatprivate equity is not.
So the first thing it's gonnagive you is steady cash flows.
squadcaster-gg3c_1_05-15-2 (10:57):
Yep.
emily-sander_1_05-15-2025_1 (10:58):
Ah,
ed-barton_1_05-15-2025_153 (10:59):
what you're gonna be, what you're
gonna have on a private creditsituation is you're gonna have
monthly or quarterly payments ofinterest or interest.
No, it's
emily-sander_1_05-15-2025_1 (11:06):
Oh.
ed-barton_1_05-15-2025_15362 (11:07):
in principle.
Returning.
And so your money is now, you'regonna have to put it back to
work, but you're getting aconstant stream of cash where
private equity, you might notsee cash for years until it
that, until that investmentflips.
So it's a, it's got a differentcash flow, uh, of.
Characteristic.
And then the other piece is froma risk perspective, you are
(11:29):
sitting kinda higher stack, andso it's less risky.
And as a result, you may have asituation where you're looking
at a, you're looking at acompany or, or you're a, you're
a.
Limited partner and you'regoing, look, I've got X amount
of equity exposure, I need somedebt exposure, uh, you know, to
kind of balance my portfolio.
But the debt I want isn't, Idon't want CDs, I don't want,
(11:50):
you know, kind of normalcorporate bonds.
I wanna be able to get, youknow, a higher rate of return
and maybe throw some equityjuice in there with the, with
warrants and some of
emily-sander_1_05-15-2025_15 (12:00):
I.
ed-barton_1_05-15-2025_15362 (12:01):
So I'm gonna play in this private
credit arena where I've got,yeah, where I've got some, where
I've got better cash flow, lowerrisk than, um, than on the
private equity side.
But I've got I've got highercash flow and higher risk than I
would if it was a traditionalbond or bank debt instrument.
emily-sander_1_05-15-2025_1 (12:24):
So, so to me that then largely
depends on what else is going onin that LPs world and, and that
portfolio.
So it might be like, I don'tknow, is there a.
Ratio of equity to credit, theyhave to hit or they prefer.
ed-barton_1_05-15-2025_1536 (12:41):
not normally.
Not normally.
think that, that actually couldbe a whole nother podcast is the
characteristics of LPs andbecause they, like, you're gonna
have some LPs, and I'll use anexample, like a, like a college,
uh.
Where they need to spin off cashevery year to help support the
(13:02):
college with,
squadcaster-gg3c_1_05-15- (13:03):
Asset liabilities management.
Yeah.
ed-barton_1_05-15-2025_ (13:05):
They've gotta be able to send cash to
the university every year theendowment does to be able to pay
for scholarships and you know,repairs to buildings and other
things.
And you may have others.
Others that are sitting theregoing, no, we don't need any
current income.
And so they're gonna, so ifyou've got one that is kind of
leaning more toward, I've gottahave some current period income
pensions.
(13:26):
Tend to need current periodincome insurance companies tend
to need current period incomeactuarially.
squadcaster-gg3c_1_05-15-2 (13:31):
Yep.
ed-barton_1_05-15-2025_153 (13:32):
need to structure their portfolio in
such a way that part of thatportfolio is spitting off cash.
So that's where they would go,yeah, I'll allocate some to a
debt instrument where theprobability of that cash and a
predictability of that cash ismuch higher.
And then the rest of it I can islonger term and I can push that
off and be less liquid.
squadcaster-gg3c_1_05-15- (13:49):
Yeah, I mean, the other way to think
about it, uh, for just personkind of applying it to their own
lives, it's no, no different atall than kind of going to your.
You know, your financialadvisor, Raymond James person,
whatever, overpriced wealthmanager, whatever that may be,
and just be like, they tell you,well, you should have a
portfolio of a bro.
How old are you?
What are your obligations?
(14:09):
Okay, you're
emily-sander_1_05-15-2025 (14:10):
Yeah.
squadcaster-gg3c_1_05-15-202 (14:10):
so maybe you should have 60% in
stocks, 40% or 60% equity, 40%fixed income.
it's, it's no different.
You know, you're just allocatingof magnitude, larger sums, but
it really comes down to a fixedincome strategy and an equity
strategy.
kind of blending those togetherand making from a risk return
(14:31):
standpoint.
emily-sander_1_05-15-2025 (14:31):
Yeah, and I'll sound fancy'cause this
is true.
Yesterday I was talking to aultra high net worth individual
and she was looking for, she hada VC firm where she was
investing in Port Coast, but shewas also looking to be an LP for
VC and PE firms.
and so she was like, look, I, Ihave cash to spend.
She had certain things shewanted to hit in terms of.
(14:52):
Mission and, uh, the impact inthe world and certain things
like that.
But, she was, look, she waslooking for good places to, to
invest her money.
squadcaster-gg3c_1_ (15:02):
absolutely.
And you know, that's, youtouched on a nice little subject
there, and so you know, the sameas how we've talked about in our
book and on this podcast.
What's the difference between.
You know, uh, venture capitalequity plays and private equity
plays, you know, there's earlystage more risky and the venture
less risky.
(15:22):
On the equity side, the samething occurs on the private
credit side too.
So there's, you know, venturedebt funds out there and there's
ven, you know, private creditfunds that are act more like
equity.
Uh.
in so far as like the types ofcompanies in the life stage that
they're at.
I work for a startup, you know,myself, and we talk more to VCs
(15:43):
and venture debt providers thanI talk to around private equity
and private credit today.
You know, it's just a major oflike risk at the end of the day
and, uh, and where a company'sat as far as their, their
lifecycle's concerned, you know,so.
two sides of the same coin, ifyou will, just to kind of put a,
you a button on that.
(16:04):
Um, but there's just somedistinct differences on, as, as
we talked about, that riskreturn profile.
And a lot of times these twoentities or these two asset
classes work together.
Like if it, you know, a privateequity group, uh, is buying a
company, they need, they needleverage to, to make that
acquisition.
(16:24):
You know, if, if they can't getas attractive at terms.
As they want with, you know, oneof the big banks out there,
private credit is right there tolock arms with them and do a
deal.
And oftentimes they do a deal inthe, in the early part of it,
and then quickly get refied out.
Once,
emily-sander_1_05-15-2025_1 (16:40):
Oh.
squadcaster-gg3c_1_05-15-2 (16:41):
once the company they're buyings hit
a certain threshold where theycan support, you know, bank debt
and stuff like that.
emily-sander_1_05-15-2025 (16:47):
Okay, so gimme an example.
If I'm like a pe we're a PEfirm.
and the market conditions aresuch as they are.
We talked about this last time,so I don't know if this affects
it, where it's like, oh, in thismarket condition, we want more
of this.
can you run me through ascenario where we would want to
be in multiple layers of thatcap stack,
ed-barton_1_05-15-2025_15 (17:05):
Yeah, I can give you, I can give you
one kind of out the gate, whichis, as you, if you're investing
in a business, you may come inas a.
As preferred equity, forinstance.
And that business is kind ofcranking along.
It might be doing fine, but it'snot performing the way you
anticipated and they need someadditional cash.
squadcaster-gg3c_1_05-15- (17:26):
Yeah.
ed-barton_1_05-15-2025_1536 (17:27):
Um, and so you go, okay, instead of
putting in more private, morepreferred equity, I'm gonna put
in mezzanine debt.
I'm gonna basically put in somedebt.
So I'm gonna get some cash out.
'cause you, they probably can'tgo to a bank or we don't want to
go to a bank because, you know,we're in a.
Either covenants or somethingalong those lines where we
can't.
squadcaster-gg3c_1_05-15- (17:46):
Yeah.
ed-barton_1_05-15-2025_15362 (17:47):
as a private equity firm, instead
of going, I'm gonna give youmore equity, they go, no, I'm
gonna give you a Mez debt andI'm going to kind of charge you
14% interest and I'm gonna takeanother 10% of equity as a in
warrants.
And that way I'm more protected.
I've kind of, I've kind of puta.
against my other equityinvestment, so I get paid first
(18:09):
I'll get that money out.
So if it essentially crams downmore on the, on the common
squadcaster-gg3c_1_05-15- (18:15):
Yeah.
emily-sander_1_05-15-2025 (18:16):
Okay.
Gonna switch tenses.
We're no longer the PE firm,we're just podcast people
talking about this.
So if the PE firm, you saidthey, the PE firm, uh, they were
charging 14%.
Like to whom?
ed-barton_1_05-15-2025_15362 (18:29):
to their portfolio company.
emily-sander_1_05-15-2025 (18:31):
Okay.
So they're adding, they'resaying you're not performing
well.
So, and we don't wanna stroke acheck and, or we can't take out
a further bank loan.
ed-barton_1_05-15-2025_ (18:39):
they're stroking a check.
They're just going, the checkwe're stroking is now debt, not
more equity, and you have tostart paying us back right away.
emily-sander_1_05-15-2025_1 (18:46):
Oh.
ed-barton_1_05-15-2025_153 (18:46):
And, and we're gonna charge you
interest and we're gonna passthat through to the LPs and
you're gonna give us more equityfounder because you haven't
quite performed the way weexpected.
And, but we think you will.
But we're not gonna, but the waywe're gonna put in more money is
in a.
Higher on the capital stackposition that's gonna get us
cash flow.
Now
squadcaster-gg3c_1_05-15-2025 (19:06):
I see that a lot too.
I mean, it's just another formof a bridge loan, you know, in,
in a company that needs it, youknow?
And a lot of these cases, youknow, you ask the question,
well, why would, why wouldsomebody ever.
Work with private credit ormezzanine lenders when they
could, maybe they could go getbank debt.
Well,
ed-barton_1_05-15-2025_153 (19:21):
they probably can't.
squadcaster-gg3c_1_05-15- (19:23):
Yeah, they probably can't.
And banks move slow banks areoften a lot more regulated,
which means their appetite forrisk changes from time to time.
Right.
so one thing that's consistentis the private credit market is
a lot less regulated.
There's more flexibility instructuring because they're
non-depository institutions thathave.
Very specific capitalrequirements and things like
(19:44):
that.
There's a whole line of reasonswhy there is a whole, there is
in fact a private credit marketthat exists to be basically an
alternative to banks.
Because if, if, if the banksruled the world entirely, there
wouldn't be a private creditmarket.
But there sure is because ofsome of the challenges that
banks have and folks have withworking with banks from time to
time, you know,
emily-sander_1_05-15-2025_1 (20:05):
Can we put some numbers to this?
So we talked about privateequity was like, I think it was
like 7.5 trillion and privatecredit was significantly less,
like 1.7 trillion, but stillwe're talking like trillions
with a T.
squadcaster-gg3c_1_05-15-20 (20:16):
And I, I saw, I read a stat today
even that's, by 2032, it's gonnabe well over 10 trillion on both
sides.
So private credit is probablygrowing faster right now than
private equity.
But private equity still isnominally bigger only because.
The credit market, let's justsay the fixed income market
(20:38):
globally is many multiplesbigger than the equities market.
But there's publicsecuritizations, there's bond,
public bond offerings, there'sbank debt, there's, there's,
that means that like the biggerslices of the overall credit
market, there's already bigplayers in there, private credit
represents a, a large andgrowing proportion of all of
(20:59):
that.
So if you will, the.
The pie is getting bigger ofcredit, but also the size of the
pie with private credits gettingbigger as it becomes more
viable, all of those things.
emily-sander_1_05-15-202 (21:11):
what's the name of a private credit
company?
squadcaster-gg3c_1_05-15- (21:16):
Gosh, I could name a, a lot of, um,
Blackstone's got a privatecredit strategy.
Apollo, Aries, I mean there's awhole, there's whole so many.
I mean, I have a private.
Investment business thatacquires consumer bankruptcy
debt that could be consideredboth a private equity fund and a
private credit
emily-sander_1_05-15-2025_1 (21:35):
Oh.
squadcaster-gg3c_1_05-15- (21:35):
which way you slice it.
So
ed-barton_1_05-15-2025_ (21:36):
Mm-hmm.
squadcaster-gg3c_1_05-15-202 (21:36):
is just a term that means you're
providing debt in a privatemarket.
So it could be a million dollarfund, it could be a, you know,
billion fund.
Same thing
emily-sander_1_05-15-2025_15 (21:47):
Is it kind of like a bank has
different divisions of the bankthat do very different things,
but they're all part of the samebank
squadcaster-gg3c_1_05-15-20 (21:53):
for the big funds.
Absolutely.
emily-sander_1_05-15-2025_ (21:54):
ish.
Okay.
Okay.
squadcaster-gg3c_1_05-15- (21:56):
Yeah.
ed-barton_1_05-15-2025_15 (21:56):
Well, and and what's interesting is
this private credit market, someof the banks have tried to get
into it.
SVB, Silicon Valley Bank wasextraordinarily successful for a
long time.
And working the fringes of thismarket and going, Hey, we're
gonna loan, they're gonna bekind of with sponsor finance.
So they had a sponsor financegroup and they would kinda work
with private equity to providethe debt.
(22:18):
Um, they would get fundguarantees, they would get, you
know, participations, they'dget.
You know, all the, that kind ofstuff.
And they, they were like thebank lender that played in this
space.
The problem was they, when theyfailed, they didn't fail.
'cause they weren't profitable.
They failed because they weren'tliquid.
squadcaster-gg3c_1_05-1 (22:32):
Mm-hmm.
ed-barton_1_05-15-2025 (22:33):
couldn't get, they, there was a kind of
run on deposits.
They couldn't get the, theycouldn't get these loans to, you
know, you can't sell'em on asecondary market.
They don't, you know, they, theyare performing, but you know,
you have to get certain level ofliquidity and they're illiquid
relative to normal bank debt.
emily-sander_1_05-15-2025_15 (22:50):
So are you locked in for a
duration?
ed-barton_1_05-15-2025_1536 (22:53):
Uh, it there.
So in a lot of cases, if you'rein a, if you're in a bank
environment, um, traditional,uh, depository institution, bank
environment, there, there.
Regulated by both federalregulation, international
regulations, so like Basel Baseltoo, which is, you know, kind of
here's what your risks need tolook like.
And they can sell and do sellloans across, like, and they
(23:15):
sell participation in loans and,you know, so they, they don't
hold all this stuff on theirbooks, securitize it, which, you
know, Rory was talking about.
So ones with certain types will
squadcaster-gg3c_1_05-15- (23:24):
Yeah, pull it up.
ed-barton_1_05-15-2025_1536 (23:25):
the market.
A lot of these private, privatecredit, um, type loans.
They're so bespoke as far as theterms and conditions and what
they're kind of, what,sweeteners are in'em and those
kind of things that they, thatyou can't securitize'em and they
don't tend to play withparticipation and they don't fit
in the Basel two type, uh, uh,credit And so when you, when if
(23:51):
you want someone else to play,it's normally gotta be another
private credit fund.
You can't just kind of go outand go, well, banks, you know,
why don't you wanna play inthis, in this pool?
squadcaster-gg3c_1_05-15- (24:00):
Yeah.
ed-barton_1_05-15-2025_1536 (24:01):
And so it's a, it's a different,
it's a different animal.
emily-sander_1_05-15-2025_15 (24:04):
So if there's a run on the private
credit, there's nowhere for themto turn to try to get.
ed-barton_1_05-15-2025_1536 (24:08):
the thing is with private credit,
there is no run because privatecredit's not a depository
institution with a bank.
The depository institution likeSilicon Valley Bank, the loans
on this side, on the, on theasset side of the balance sheet
are offset by deposits.
On the liability side of thebalance sheet.
And so if all of a sudden peoplewant a bunch of depo, want their
de their money back fordeposits, bank has to pay cash.
(24:30):
Well, the only way to get cashis you have reserves and then
you've got the, the loans andthey can't, it's tough to bundle
those loans up and sell'em theydon't fit the, they don't fit
these buckets nicely.
squadcaster-gg3c_1_05-15- (24:41):
Yeah, and that's why banks are
governed.
The way they are so heavily isso that can be avoided at at the
highest possible way, which iswhy you don't like relatively.
see a lot of runs on bankdeposits and, and bank failures.
I think the one was, was kind ofunique by, by virtue of the
specialization, ed talked about,you know, you'll, you'll never
(25:03):
see.
mean, you'll never, you're nevergonna see a Bank of America
fail.
I mean, it, it just, it's notgonna happen because of the, all
of the regulation around that.
Uh, and also just, you know,they'll get propped up.
ed-barton_1_05-15-2025_1 (25:15):
Right.
Yeah.
squadcaster-gg3c_1_05-15-20 (25:16):
SDB was kind of propped up even
ed-barton_1_05-15-2025_ (25:18):
Mm-hmm.
squadcaster-gg3c_1_05-15-202 (25:18):
to go down that hole.
I mean, they were packaged upand sold to, I think first
Citizens.
but anyway, point being is theilliquidity aspect of the
private.
Equity in private credit marketspresents more risk and therefore
more return.
But there's, you know, you knowthe return's not guaranteed.
Let's just say it that way.
emily-sander_1_05-15-2025_ (25:39):
Then if we're talking like numbers,
what, so first of all, we talkedabout the characteristics.
So for private credit, you'regetting paid out monthly, not
dividends.
What was the word you used?
Interest.
Interest.
'cause
ed-barton_1_05-15-2025_15 (25:49):
gonna be in principle.
emily-sander_1_05-15-2 (25:51):
interest to principle.
Okay, so those are paid out andboom.
Like slow drip, slow drip, slowdrip every month.
The private equity is a big slugat the end if you do well.
Yes.
squadcaster-gg3c_1_05-15- (26:01):
Yeah.
ed-barton_1_05-15-2025_1 (26:02):
that's a good generalization.
It's not.
That's
emily-sander_1_05-15-2025 (26:05):
Fair.
ed-barton_1_05-15-2025_15 (26:05):
every situation's
emily-sander_1_05-15-2025 (26:06):
Sure.
Broad strokes.
And then for the private credit,is there something at the end or
is it just the slow drip?
ed-barton_1_05-15-2025_15 (26:13):
Yeah, there could be.
If there were warrants attachedto it,
emily-sander_1_05-15-2025 (26:15):
Okay.
ed-barton_1_05-15-2025_15 (26:15):
there could very well be equity that,
that, that kind of converts intoequity.
And so when the companytransacts, they end up with
another slug or, you know, butthat's general, that's generally
gonna look like a warrant or a,an option.
squadcaster-gg3c_1_05-15-20 (26:30):
But yeah, put some numbers behind it
though.
Think about maybe I.
Your typical private equityreturn profile is probably twice
what the private credit returnprofile is.
So you might be looking at a 15to 25% of return expectation on
private equity, somewherebetween seven and 12% on average
on
emily-sander_1_05-15-2025 (26:49):
Okay.
squadcaster-gg3c_1_0 (26:50):
reflecting that risk differential.
emily-sander_1_05-15-2025 (26:52):
Okay.
Um, this might be a sillyquestion, but.
Is it like a hedge situation?
So if the company does well, thecredit does less well, or is it
like No.
If the company does well, bothof those ships rise
ed-barton_1_05-15-2025_1536 (27:03):
Um, with, with private credit,
especially mezzanine structured,ships rise but normally your
equity ship rises higher
emily-sander_1_05-15-20 (27:12):
higher.
Okay.
ed-barton_1_05-15-2025_1536 (27:14):
Um, but the, but the debt gets paid
off and normally there was some,know, a sweetener or something
in there where they get a, wherethey get some juice at the end
too.
squadcaster-gg3c_1_05 (27:23):
generally speaking, the company does well,
you know, um, all sort of partsof the capital stack generally
do well.
I mean,
emily-sander_1_05-15-2025 (27:32):
Okay.
squadcaster-gg3c_1_05-15-20 (27:32):
the point.
Now, if it gets, it's on themiddle ground where it's does
okay, but not great, that meansthat.
Probably the lender's gonna dojust fine, but maybe the
equity's not gonna be doingquite as good.
Right.
So you could find scenarioswhere maybe the relative
ed-barton_1_05-15-2025_153 (27:46):
Yep.
No, very much so.
Yeah.
emily-sander_1_05-15-2025_ (27:48):
Hmm.
squadcaster-gg3c_1_05-15-2 (27:48):
I've been part of businesses like
that.
I
emily-sander_1_05-15-2025 (27:50):
Yeah, and this is also where it ties
into our previous episodes whereit's like that initial
negotiation of where you fall inthe waterfall and when you get
paid out can make night and daydifference.
ed-barton_1_05-15-2025_153 (28:01):
Yep.
squadcaster-gg3c_1_05-15-2 (28:02):
both initial negotiation, but also
continued negotiation as thecompany evolves.
you know, as Ed and I haveworked together on some of these
deals literally over the, likelast 15, 20 years, it's like,
know, there's a lot of times inwhich you restructure a business
and you're, you're renegotiatingthe positions of all the capital
providers in, in that stack, youknow, multiple times over the
(28:24):
life cycle of a business.
It's, that's how it goes.
emily-sander_1_05-15-2025_15 (28:27):
Is there an equivalent of like when
you hear about diluting equityor splitting shares, is there an
equivalent for the credit side?
squadcaster-gg3c_1_05-15-2 (28:34):
Hmm.
Good question.
Hmm.
emily-sander_1_05-15-2025_ (28:39):
Both of them.
ed-barton_1_05-15-2025_1536 (28:40):
Not really.
I mean, what, what, what you endup, what you end up, because
it's not like shares to dilute.
It's basically what could happenis you end up with a s with
someone who's in a Mez position,and then they add additional
senior debt above you.
And normally there's arestriction.
Mez folks will put restrictionson kind of how far they can get
buried in the cap stack,
emily-sander_1_05-15-2025 (29:02):
Yeah.
ed-barton_1_05-15-2025 (29:02):
Normally that's gonna end up being a, you
know, if you have a, a formalrestructuring or a receivership
or a bankruptcy, that's where,you know, you get the pennies on
a dollar.
squadcaster-gg3c_1_05-15- (29:13):
Well, yeah.
ed-barton_1_05-15-2025_153 (29:13):
The, the, the Mez folks may get, you
know, the, the senior securedmay get fully paid.
squadcaster-gg3c_1_05-15- (29:18):
Yeah.
ed-barton_1_05-15-2025_15 (29:19):
folks may get 40 cents, 30 cents, 10
cents on a dollar equity getsnothing.
squadcaster-gg3c_1_05-15 (29:23):
Right.
to the, to the, maybe the ofyour question too was around,
hey, you, no matter whatposition that you're in, in the
cable stack, can you.
Can you, can you see your returnkind of be diminished?
The answer to that is yes.
And like on, even on, eventhough it's not share based in,
in the debt side, credit part ofit, I've, I've been the, uh,
(29:46):
cause of this, uh, in otherbusinesses where, you know, you,
you do all this work with alender to put a facility in
place.
And the markets move and you'reable to refi that debt out, you
can kind of screw the lenderbecause they went into it with
the intention, like, I'm gonnaget, uh, a rate of return of,
you know, 12%.
But if you refi that out, yeah,sure, you're paying back all the
(30:08):
principle, but you do itquickly, they're not gonna get a
12% return.
It'll be much less than that.
So it's, that's, and it justlike it is in the, you know,
personal mortgage industry.
Right.
Or like, you know, constantlyfinding better rates and you're
trying to.
You know, get the best deal foryourself.
Well, you, you know, every timeyou do that, know, unless
there's specific structure inplace where returns kind of
(30:29):
guaranteed, which in a lot ofcases that is how it works.
You know, that lender can, cankind of screwed for all the
time, effort, and energy, andeven risk that they put into it,
but then they don't get thereturn from all of that.
ed-barton_1_05-15-2025_153 (30:40):
I'll give a, I'll give a real world
example, and Emily, you real,you probably weren't aware of
this, but the last company weworked together at, we had
seniors, senior debt, um,provided by Silicon Valley Bank.
We did an acquisition, theseller did seller financed debt.
Which had to subordinate to,
emily-sander_1_05-15-2025_1 (31:01):
Oh.
ed-barton_1_05-15-2025_ (31:01):
Silicon Valley Bank, and so they had a
higher interest rate and we weremaking the payments.
But when Covid hit, we flunkedcovenants.
emily-sander_1_05-15-2025_153 (31:10):
I remember that.
ed-barton_1_05-15-2025_1536 (31:11):
and so, Silicon Valley Bank said,
um, you will no longer makepayments to your junior, to
your, to the, to thesubordinated debt.
And so we had to stop makingpayments.
We had to stand still that,that, those debt payments.
And so that was one.
squadcaster-gg3c_1_05-15-2025 (31:25):
a perfect example.
ed-barton_1_05-15-2025_15 (31:26):
Where they were like, wait a second,
what do you mean you're stoppingthe, the debt payments?
And we're like, sorry.
The, the senior, the seniorlender has a provision where if
we trip to covenants, you don'tget paid until we're back into
compliance.
And so.
squadcaster-gg3c_1_05-15- (31:41):
Yeah.
emily-sander_1_05-15-2025_1 (31:42):
You gotta read the fine print.
ed-barton_1_05-15-2025_15 (31:44):
Well, and, and there's not, yeah, you
do, but it's also understandwhere you're at
emily-sander_1_05-15-2025 (31:48):
Yeah.
ed-barton_1_05-15-2025_15 (31:49):
stack and you can get kind of
disintermediated temporarily orpermanently, depending on kind
of what it looks like.
But that's one where it was atemporary, they ended up getting
made whole at the end, um, whena company sold.
But until then, it was, youknow, you're getting some of it.
You're getting none of it.
You're getting, you know, this,this quarter you're fine.
(32:09):
Next quarter you're not.
And they were in a subordinatedposition,
emily-sander_1_05-15-2025_1 (32:14):
All right.
Final thoughts, takeaways forour listeners?
Private cap.
ed-barton_1_05-15-2025_1536 (32:20):
so, so private.
So the on a private debt side,um.
You know, you had mentionedthere's more money flowing into
there now, and the reason, partof the reason for that is as you
have uncertainty, wanna reducethe risk.
And so that beco makes it moreattractive.
You go higher on the cap stack,you're better, you're more
likely to get repaid.
The cash flows are a little bitmore predictable.
squadcaster-gg3c_1_05-15-2 (32:41):
Hmm.
ed-barton_1_05-15-2025_1536 (32:41):
Um, you're willing to take.
The, the market itself isriskier, so you're shifting your
asset class a little bit bytaking less risk in that asset
class by shifting over from a,from equity to debt.
And it's a really useful, ittruly is a really useful and
probably underutilized, um,tool.
A lot of founders, I think,probably would've been better
(33:02):
served to look at a private debtplacement.
squadcaster-gg3c_1_05-15 (33:05):
that's a good
ed-barton_1_05-15-2025_1 (33:06):
Rather than private equity where
they're selling off, wherethey're selling off ownership,
you get less, less dilution.
And while it might feel a littlebit worse, um, at the end of the
day you, you're gonna end uphaving a much higher upside, you
know, I.
squadcaster-gg3c_1_05-15-202 (33:20):
of that big time in, uh, you know,
in the venture world where,where venture debt is a thing
where you get your firstinstitutional round of equity,
you layer on some, you basicallytake less equity, more venture
debt.
Venture debt wants to come inwith an institutional investor
you don't dilute yourself asmuch.
So, yeah, I just, I think thatlike some of the ones that Ed
(33:41):
and I have worked for.
Where they don't go through thatventure debt round, they just
kind of go through bootstrap.
From bootstrap to private equityis Ted's point, should consider
the private credit route inconjunction with any private
equity that's, uh, you know,considered.
So yeah, I mean there's myriadof things and I think the only
thing we wanted to take away,one of the things we wanted take
(34:01):
away is.
what does this term mean?
You hear it thrown around somuch these days, but it's not
something that's new.
It's just something that isfocused on now.
And you know, hopefully we'vedemystified it a little bit the
same way we've done that withprivate equity, uh, as an asset
class.
emily-sander_1_05-15-2025 (34:18):
Yeah, so dear listener, now you know
what PC stands for.
You know about the debt side,you know that being
disintermediated is bad.
You know that being in the midmezzanine level is good for both
cap stacks and theater viewingand.
You can join us next time forthe next round of the risk
Premium drinking game here onthe.
squadcaster-gg3c_1_05-15-20 (34:40):
go.
Let's go.
Yep.
I can't wait.
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