[blabberwocky]

LBOs haven’t been the defining structure of PE for a while now, though leverage is still a key ingredient. The massive growth of the “PE industry” over the last decade has really been on the credit side (which does include equity plays, e.g., in real assets and distressed debt that leads to equity positions) despite the low interest rate environment.

[paganel]

Do you happen to know if “private credit” (I don’t know if that is the actual correct term) is a big part of PE’s investments? I stumbled upon mentions of it more and more during the last 2 years (I’d say) and it kind of gave me some “this can’t be structurally right”-vibes. Or maybe that is just a very small market, comparatively speaking, and I’m talking bs, hence my question.

[mbesto]

It's absolutely part of the investment structure. It's no different from buying a house that you would rent out for yield. If your yield outpaces the costs (maintenance, taxes, utilities, AND the mortgage rate) then you are basically have an arbitrage. This is no different from what PE does and is why they typically leverage ~50% of the acquisition price.

[clairity]

to nitpick, neither yield outpacing costs nor PE is arbitrage. arbitrage is structurally zero-risk, while those other cases have relatively small but non-zero risk, since yield, costs, interest rates, regulations, etc. can change over the lifetime of the deal. arbitrage generally happens due to a mispricing and an opportunity to buy and sell at (approximately) the same time.

[mbesto]

Fair point.

[blabberwocky]

Yes, it’s now a major business for the big PE firms (which today are really diversified investment managers) with AUMs that can significantly exceed that of (traditional) corporate PE. But its their credit vehicles that invest in credit. So their corporate PE funds might do buyouts or growth equity or whatever, but won’t generally be direct-lending or buying securitized debt.

[cs702]

Thanks! Yes. I updated my comment.