Can Well-Structured Borrowing Arrangements Supercharge Private Credit Fund Returns?

There is increasing recognition among investors of the pivotal role well-structured borrowing arrangements play in driving returns.

A recent research report produced by the Alternative Credit Council and Dechert LLP reveals that 66% of private credit manager respondents are employing leverage within their investment strategy and suggests investor appetite for leveraged returns is increasing. There is no one-size-fits-all approach to how leverage is adopted – the approach in any given scenario is likely to be influenced by a combination of investors’ appetite for risk, the nature of the investment strategy, the underlying assets, structuring considerations such as tax and creditor protection and the availability and price of borrowing.

This is also an area where the market is seeking to offer greater flexibility and accommodate multiple investor preferences – 41% of respondents include both levered and unlevered sleeves within at least some of their private credit funds.

Key Issues To Consider Now

1. Levered funds can offer significant benefits including enhanced returns on capital but given the bespoke nature and complexity of these structures, managers must thoroughly understand the potential issues that may arise.
2. Flexibility of levered structures is increasingly important when considering investor preferences. Assess factors such as investors' risk appetite, nature of investment strategy, structuring considerations, and availability and price of borrowing in order to determine the most appropriate leverage method to support investment strategy.