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Musings on corporate finance, fund raising, debt capital and other matters

The Anatomy of a Direct Lender

Most business owners would be able to tell you that a bank takes deposits and gives out loans. However, if you were to ask the same about private debt lenders, they would struggle to respond. Here we explain the structure of a direct lender:

Much like a mutual fund, private debt funds are a specialised type of legal entity that holds and invests a pool of capital on behalf of a group of investors. The fund will be run by an asset management company (or fund manager) that will likely own and supervise a group of funds. The investors will agree with the fund manager on a set of criteria for businesses that the fund will invest in.

Unlike a mutual fund, private debt funds usually have a fixed life, a fixed initial size, and are only open to sophisticated institutional investors.

Below the raising and investing of a fund, and the process of follow up investments are explained.

Raising a Fund

Before being able to lend, the fund manager will approach investors requesting that they commit a cash amount to the fund. The process of gathering commitments usually takes between 6 months to 18 months. Total funds can range from £50 million at the smaller end to billions at the upper end. Together with a core amount of “seed capital” often committed by the fund manager itself, this cash is then used to lend to companies.

Investing the Fund

The pool of un-invested money, often referred to as “dry powder”, is slowly drawn down as it is invested in businesses. Most funds look to invest all the cash for a 2-3 year periods.

Return and Follow on Investing

Over time, the business will pay back their loans and the fund will return money to investors. In the meantime, the fund manager will often raise another fund with the same investment mandate. In doing so, they ensure a constant pool of cash ready to invest in high quality companies that need debt finance.