Private Credit & Its Role in Modern Buyouts

Page 1

Private Credit & Its Role in Modern Buyouts

• Educational Presentation #16 – Private Equity

• Date of publication: 19.01.2026

• Property of the ESCP Alternative Investment Society (AIS)

• Sources: UBS Asset Management, Apollo, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Ares, Blue Owl Capital, Blackstone, Carlyle

Page 2

Section I: What is Private Credit?

Page 3

Section I: What is Private Credit?

Defines private credit and highlights the key drivers behind its expansion What is Private Credit?

Main growth drivers

Private Credit is non-bank debt financing, provided outside public markets 1

• Investors have reallocated capital to private credit in search of yield

• Borrowers value the flexibility and speed of private credit financing

It serves financing needs unsuitable for traditional bank lending 2

Private Credit market growth (USD bn)

1,800

Key areas include sponsor finance, mid-market lending, infrastructure, and asset-backed finance 3

1,500

CAGR:

1,200

12.84%

As banks retreat from middle-market lending and markets grow volatile, private credit has become a vital source of capital 4

It uses a broad range of products tailored to financing needs 5

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024F 0

Source(s): UBS Asset Management (2024)

Page 4

Section I: What is Private Credit?

Showcases key players driving scale, innovation, and capital deployment in private credit Leading Private Credit providers

​Parameters

​Name

​Carlyle

​Blue Owl Capital ​Apollo ​Blackstone

​Logo

​Strategy

Direct lending

Broad Credit

Direct lending

Private credit

$500m-$2bn+ $250-$1bn+

$250-$1bn+

$100-400m

Deal Size

​Market Focus

Upper-middle-market

Large corporate

Middle to large

Sponsor Backed

$152bn

$723bn

$508bn

$208bn

​AUM

Note(s); AUM figures refer to private credit platforms

Page 5

Section I: What is Private Credit?

The Growth of Private Credit

Outlines the regulatory, market, and investor forces shaping private credit growth

• Structural shifts in banking, capital markets, and investor preferences have driven the sustained expansion of private credit

Key Drivers:

Bank Retrenchment Basel IV and post-GFC regulation raised bank capital requirements, constraining middle-market lending and supporting private credit growth

Financing Volatility Despite widespread floating-rate structures, heightened interest-rate volatility has increased demand for committed private financing with pricing certainty, reducing reliance on the syndicated and public market

Interest Rates Extended low interest rates reduced returns in public credit, leading institutional investors to allocate to private credit for higher contractual income and stronger risk-adjusted returns

Customisation Private credit allows lenders to negotiate covenants, collateral packages, amortisation, and pricing modifying cash flows and credit risk, enabling more precise underwriting than public markets

Financing Vehicles Private credit growth has been driven by new financing structures such as business development companies, evergreen private credit funds, insurance-managed accounts, and separately managed accounts

Page 6

Section I: What is Private Credit?

Private Credit Structuring

Explains how private credit underwriting, structuring, and monitoring translate into predictable income and downside protection

1. Loans are underwritten to be held through maturity, enabling tighter documentation, conservative leverage, active monitoring, and focus on downside recovery rather than interim mark-to-market volatility

2. Returns are driven by floating-rate interest, spreads and fees, with capital-structure priority shaping downside risk rather than income generation

3. Negotiated covenants and reporting provide early warning signals and enforcement optionality, allowing lender intervention or restructuring before material value erosion

4. Amortisation, call protection, and cash vs Payment in Kind (PIK) interest are structured to align expected life, income profile, and risk-adjusted returns

Predictable income, stronger downside protection, and improved recovery outcomes across market cycles

Page 7

Section II: Private Credit in Modern Buyouts

Page 8

Section II: Private Credit in Modern Buyouts

How private credit is positioned within the buyout capital structure, defining its relationship to equity, traditional debt, and leverage Role of Private Credit in Buyout Financing

Capital Stack

Economic Role in Buyout Financing

Secured Debt (e.g., Bank Loans)

Positioning

• Sits above private equity in the capital structure, with priority claims on cash flows and assets • Provides contractual interest and principal repayment before equity holders receive returns

Private Credit – Senior / Unitranche

Debt

Private Credit – Subordinated /

Substitution

Mezzanine Debt

• Replaces or supplements traditional bank loans and bonds, particularly in sponsor-led transactions • Favored when speed of execution, certainty of funding, or bespoke terms are required

Preferred Equity

Leverage

• Enables higher leverage in LBOs, increasing the proportion of debt used to finance acquisitions • Reduces the equity contribution required from sponsors, enhancing potential equity returns (and risk)

Private Equity (Sponsor Capital)

Page 9

Section II: Private Credit in Modern Buyouts

Compares financing processes to highlight execution certainty and timing advantages in buyout transactions Why Private Equity Sponsors Use Private Credit

Syndicated Loan / Bond Process Private Credit Process

Sponsor Motivation

Market Sounding

Direct Negotiation

Execution Reduces execution risk in competitive or time-sensitive transactions Allows sponsors to commit to bids with confidence of funding

Committed Capital

Syndication / Bookbuilding

Certainty Capital is committed upfront, limiting exposure to market volatility Avoids re-pricing or failed syndications during adverse market conditions

Investor Demand

Single Documentation

Pricing & Allocation

Certain Close

Timing Enables buyouts when public credit markets are closed or unstable Supports deal completion regardless of short-term market sentiment

Sponsors often accept higher costs in exchange for speed, certainty, and execution control

Market-Dependent

Close

Fewer steps Higher certainty

Page 10

Section II: Private Credit in Modern Buyouts

Typical Use Cases in Buyouts

Demonstrates the role of private credit across varied buyout execution scenarios

• Private credit enables buyouts in situations requiring speed, certainty, and bespoke structuring beyond what traditional lenders can provide

The examples below highlight when private credit is preferred across different buyout scenarios:

Time-Sensitive or Complex

Platform & Buy-and-Build

Secondary (Sponsor-to-

Mid-Market Buyouts

Deals

Strategies

Sponsor) Buyouts

Used where companies lack access to deep syndicated loan

Supports acquisitions with repeat add-ons, delayed-draw

Used when leverage needs are high and certainty is required to

or bond markets and require a

Preferred when execution speed, certainty of funding, or bespoke structuring is critical to

refinance an existing capital

reliable, non-bank financing

completing the acquisition

needs, and flexible documentation over time

structure efficiently

solution

Prioritizes speed and certainty

Addresses financing gaps where

Facilitates efficient refinancing

in competitive or bespoke

public markets are inaccessible

and leverage optimization

Realizes immediate uplift via public-market valuation spread

transactions

Page 11

Section II: Private Credit in Modern Buyouts

Common Private Credit Structures in Buyouts

Illustrates how private credit structures are used to address execution, complexity, and financing needs in buyout transactions

• The following private credit structures are commonly used in buyouts, shaping execution certainty, structural simplicity, and financing flexibility across transactions

Senior Direct Lending

Unitranche Financing

Mezzanine Capital

• Provides a simple, execution-certain financing solution with a single lending partner • Commonly used in mid-market buyouts prioritizing speed and simplicity

• Combines multiple financing layers into a single facility to simplify documentation and accelerate deal execution • Preferred in competitive or timesensitive buyouts where certainty of funding is critical

• Supplements core financing when senior debt capacity is constrained or acquisition leverage requirements are higher • Used selectively to bridge financing gaps without altering overall transaction structure

Private credit structures are selected based on execution needs and transaction complexity rather than standardized debt hierarchies

Page 12

Section III: Financing Mechanisms in Private Credit

Page 13

Section III: Financing Mechanisms in Private Credit

Core Financing Mechanisms in Private Credit

Compares the primary private credit instruments used in buyout financing based on position in the capital structure and risk–return profile

Unitranche Debt

Mezzanine Capital

Second-lien Debt

Senior Direct Lending

• Subordinated financing ranks below senior debt, is typically unsecured, and offers higher yields due to elevated risk and equity-like features

• First-lien, asset-backed loans with top priority, offering lower yields due to strong collateral, covenants, and high recovery rates

• Unitranche loans are used to blend senior and second-lien debt with effective first-lien priority, generating midrange private credit yields between senior and second-lien debt

• Junior-secured loans with second priority on collateral behind firstlien debt, delivering higher yields than unitranche due to increased loss severity and weaker control rights, often shares the same asset base

Private credit instruments offer a spectrum of risk and return, allowing lenders and sponsors to tailor financing structures to transaction needs

and downside tolerance

Page 14

Section III: Financing Mechanisms in Private Credit

Control Rights by Type of Private Credit

Compares lender control, covenant protection, and enforcement rights across private credit instruments

Senior Secured

High Control

• Covenant protection: Tight maintenance covenants with early intervention triggers • Enforcement authority: First-priority enforcement rights over pledged assets • Information access: Extensive reporting, budgets, and lender access rights

Unitranche

High Control

• Covenant protection: Senior-style covenant packages within a single loan agreement • Enforcement authority: Borrower-facing enforcement authority equivalent to first-lien debt • Information access: Comprehensive reporting consistent with senior secured lending

Medium

Second-lien

Control

• Covenant protection: Covenant coverage applies but without control or certain rights • Enforcement authority: Enforcement subject to intercreditor standstill and consent limits • Information access: Regular reporting, often secondary to first-lien lenders

Mezzanine

Low Control

• Covenant protection: Limited or incurrence-based covenants with fewer intervention triggers • Enforcement authority: Contractual subordination significantly restricts enforcement actions • Information access: Restricted reporting and limited direct access to management

Page 15

Section III: Financing Mechanisms in Private Credit

Use Cases and Risks of Different Types of Private Credit

Based on the specific use case of each debt type the overall risk and risk sources vary

Senior Secured

• The core private credit deployment where returns are primarily supported by first-priority claims on pledged assets, strong covenant packages, and contractual cash-flow rights • Performance is exposed to asset value deterioration and cash-flow disruption, with returns capped by senior positioning despite strong recovery prospects

Unitranche

• Used to enhance yield relative to pure first-lien lending while maintaining effective senior secured exposure through a single, unified collateral structure • Combines senior and junior risk in one instrument, increasing loss severity relative to first-lien debt

Secondlien

• Deployed to provide incremental leverage against an existing collateral base where asset coverage supports multiple lien layers • Subordinated lien priority and intercreditor constraints reduce recovery certainty and limit enforcement rights in downside scenarios

Mezzanine

• Used to fill capital structure gaps once secured debt capacity is exhausted, relying primarily on enterprise value for repayment • Structural subordination, limited control, and reliance on valuation and refinancing outcomes result in higher loss severity and greater return volatility

Page 16

Section IV: Economics & Trade-offs (PE vs PC)

Page 17

Section IV: Economics & Trade-offs

Where private equity and private credit investors sit in the capital stack and how this positioning affects their risk exposure. Capital Structure Positioning & Risk Profile

Private Equity

EQUITY

PREFERRED

• Residual equity holder at the bottom of the capital stack with last claim on cash flows • Returns driven by value creation at exit, including EBITDA growth, leverage, and multiple expansion • Highest risk–return profile, with uncapped upside but full exposure to business and valuation risk

EQUITY

Private Credit

MEZZANINE DEBT

POTENTIAL RISK & RETURNS

SENIOR DEBT

PRIVATE EQUITY PRIVATE CREDIT

• Sits above equity in the capital stack, typically as senior secured or mezzanine capital • Priority claim on cash flows and assets ahead of equity holders • Benefits from structural protections, including collateral, covenants, and defined maturity

Page 18

Section IV: Economics & Trade-offs

Contractual yield in private credit versus exit-driven returns in private equity Return Profiles Across Private Capital

Private Credit Return Timeline & Mechanisms

Economics of Private Credit

Interest + Fees Interest + Fees Interest + Fees Principal Repayment (Periodic, contractual cash flows)

• Contractual interest and fee payments, typically paid quarterly or semi-annually • Defined maturity profile, commonly 3–7 years • Lower return dispersion, driven by seniority, collateral, and covenants

PC Return Realization Profile: Returns are realized through predictable, contractual cash flows over the life of the investment, with limited reliance on exit outcomes

Private Equity Return Timeline & Mechanisms

Economics of Private Equity

EBITDA growth, multiple expansion, debt paydown, etc Exit

(Value realization at exit)

PE Return Realization Profile: Returns are largely unrealized during the holding period and concentrated at exit, making outcomes highly dependent on business performance and market conditions

• No interim cash flows, with capital fully at risk until exit • Exit-dependent value realization, typically after a 4–7 year holding period via sale, IPO, or recapitalization • Higher return dispersion, reflecting sensitivity to operational performance, leverage, and exit multiples

Page 19

Section IV: Economics & Trade-offs

Comparison & Trade-offs

A side-by-side comparison of risk, return, and structural differences across private capital strategies

Criteria Private Credit Private Equity

Senior or mezzanine capital with priority claim Residual equity at the bottom of the stack

Capital Stack

No interim cash flows; cash flows concentrated at exit

Cash flows

Regular, contractual interest and fee payments

Back-ended, realized primarily at exit

Return Timing

Ongoing throughout the investment life

High dependence on exit markets

Exit Reliance

Limited

First-loss exposure to business risk

Structural protection via seniority, collateral, covenants

Downside risk

Lower, outcomes clustered around yield targets

Wide, driven by operating & valuation outcomes

Return spread

Page 20

Section II: Economics & Trade-offs

Private equity and private credit outperform under different macroeconomic and market conditions When Does Each Strategy Thrive? Wins for PE vs Private Credit

Private Credit Private Equity

Interest Rates

Active IPO and M&A environments enable private equity sponsors to realize value at attractive multiples and monetize operational improvements

Floating-rate structures allow private credit investors to benefit directly from rising base rates, increasing income without relying on valuation expansion

Capital Markets Conditions

Lending Conditions

Private equity outperforms when sponsors can drive EBITDA growth through margin expansion, add-on acquisitions, and scale efficiencies

Value Creation Levers

As banks reduce balance-sheet lending due to capital and regulatory constraints, private credit fills financing gaps with attractive pricing and stronger contractual protections.

Borrowers Profiles

Financing Conditions

Integration improves predictability of cash flows and cushions performance through economic cycles

Stable borrower cash flows enable private credit to monetize risk through contractual income rather than exit-driven value creation.

Cheaper leverage amplifies equity returns and reduces cash-flow pressure, enhancing upside through financial leverage.

Private equity performs best in growth-driven, risk-on environments where favourable financing and exit conditions allow sponsors to monetize value creation. Private credit thrives when income stability, capital scarcity, and predictable borrower cash flows make contractual

returns more attractive than valuation-driven upside

Page 21

Section V: Risks, Criticism & Outlook

Page 22

Section V: Risks, Criticism & Outlook

Highlights structural concerns related to transparency, regulation, and systemic oversight in private credit markets Risks & Criticism: Market Structure and Transparency

Issues & Criticism

Private Credit

Funds

Transparency • Private credit operates with limited public reporting compared to banks or bond markets • Asset valuations and risk exposures are less frequently disclosed

Limited Disclosure

Regulation • Falls largely outside traditional banking regulation • Oversight varies across jurisdictions and strategies

Shadow Banking concerns

Regulator visibility

Systemic Oversight • Increasing interconnectedness with banks through fund leverage and financing lines • Makes monitoring and stress-testing more complex for regulators

challenges

Structural opacity raises monitoring challenges rather than immediate solvency concerns

Page 23

Section V: Risks, Criticism & Outlook

Examines how private credit performance may vary across economic cycles and affect borrowers and investors under stress Cycle & Borrower Impact

Perspectives

Performance under stress?

Private Credit Growth Concentration

Borrowers • Higher interest costs increase pressure on cash flows • Tighter covenants may limit financial and operational flexibility • Refinancing options may narrow during periods of market stress

Investors • Recovery outcomes depend on valuation and restructuring conditions • Asset valuations may adjust with a lag due to limited market pricing • Portfolio performance may become more dispersed across vintages and strategies

Page 24

Section V: Risks, Criticism & Outlook

Illustrates how persistent capital supply and financing demand sustain private credit as a long-term financing channel Structural Capital Flows in Private Credit

Private credit connects long-term institutional capital with recurring financing demand from private equity sponsors and mid-market companies. By matching capital supply and demand outside public markets, private credit has become a durable financing channel across

market cycles

Capital Supply Stability

Financing Demand Continuity

Driven by pensions and insurers allocating to long-duration, income-focused assets

Mid-market firms and PE sponsors require flexible, executioncertain financing

Non-Bank Intermediation

Cycle Resilience

Private credit funds bridge institutional capital and corporate financing needs

Capital deployment and demand persist beyond short-term public market volatility

Page 25

Section V: Risks, Criticism & Outlook

Outlook: Market Evolution & Constraints

Highlights the forces supporting continued growth alongside the constraints shaping market evolution

Growth Forces: Structural drivers supporting continued expansion of private credit as a financing asset class

Constraints: Market and regulatory factors that may limit returns and shape the evolution of private credit

• Increasing institutional capital, broader adoption, and expanding use cases underpin long-term growth

• Rising competition, return normalisation, and increased oversight influence future market dynamics

Market Balance:

Private credit growth is supported by strong structural demand, while increasing competition and regulation shape its longterm evolution

• Sustained capital inflows support deal activity and asset class growth • Private credit continues to gain scale and institutional relevance

• Competitive intensity and regulation influence future returns • Performance increasingly depends on underwriting discipline and scale

Page 26

Section VI: Case studies

Page 27

Section VI: Case studies

Apollo’s AUM: Private Equity vs Private Credit

Private Credit has become Apollo’s dominant business, accounting for roughly 80% of total assets under management

Firm Profile

Economics of Private Credit

Private Equity

Private Credit

Founded: 1990 AUM: $908 billion

Employees: 5400 Global Offices: 27

• 300+ portfolio companies • Control/majority ownership • Long holding periods (5–7 years)

Inv. Professionals: 900 HQ: New York

• 4,000+ borrower relationships • Primarily senior secured or investment-grade • Repeat origination with existing borrowers

Private Equity & Private Credit

Global Footprint

Private Equity:

Private Credit AUM:

Marc Rowan

Jim Zelter

Scott Kleinman

AUM: $185bn

$723bn

CEO & Co Founder

President

Head of Private

Credit

Page 28

Apollo Private Credit Financing: Selected Transactions

Selected transactions illustrate Apollo’s ability to deploy long-duration capital across investment-grade, structured, and asset-backed credit

Company Deal Size Sector Date Credit Product

$2.5b Airlines / Transport Oct 2024 Hybrid Capital

$2b Telecom June 2023 Hybrid Capital

$2.3b Music / IP October 2023 Asset-Backed Credit

$2b Real Estate April 2023 Real Estate Capital

Solutions

$0.5b Insurance March 2023 N.a

These transactions illustrate Apollo’s ability to deploy private credit across sectors, deal sizes, and credit products, reflecting the scale and

flexibility of its global credit platform

Page 29

Section VI: Case studies

Private credit has become Apollo’s primary scaling lever, supported by platform breadth and high-volume deal flow Why Apollo Has Shifted Towards Private Credit

Apollo’s pivot toward private credit is driven by structural market growth, bank disintermediation, and a permanent capital

advantage that enables scalable, long-duration credit investing

Structural Market Growth

Bank Disintermediation & Lending Gaps

• Stricter regulatory capital and balance-sheet constraints have reduced banks’ willingness to underwrite large, complex, or long-dated loans • Apollo has filled the financing gap through its ~$723bn private credit platform and 4,000+ issuer relationships

• Private credit is one of the fastest-growing segments in private markets, with investment-grade lending opportunities • Jim Zelter, Co-President of Apollo Global Management, has projected the private credit market to expand to up to ~$40tn over the next decade

Structural Market Growth

Demographic – Driven Demand for Income

• Increasing concentration in public equity markets and a structural decline in the number of listed companies have reduced diversification options for traditional portfolios • This has driven investors toward private markets and private credit solutions

• Approximately 12,000 Americans turn 65 each day, accelerating demand for retirement solutions and stable, yield-oriented income products • This structurally increases investor allocation to private credit strategies

Page 30

Section VI: Case studies

How Apollo Has Shifted Toward Private Credit

Apollo operationalized its pivot by separating credit from buyouts, integrating permanent capital, and scaling direct origination

Organization

Capital Base

Products & Origination

• Strong direct origination capability, independent of bank-led syndication processes • Relationships with 4,000+ issuers, enabling repeat bilateral transactions • Launch of public–private credit vehicles, including the SPDR SSGA Apollo IG Public & Private Credit ETF

• Apollo’s insurance platform, Athene, provides large-scale, permanent capital • Long-duration liabilities enable credit strategies that benefit from holding assets to maturity • Stable capital base supports spread compounding rather than short-term exits • Reduced reliance on fundraising cycles

• Complex lending activities moved out of the buyout division • Creation of Hybrid Capital as a standalone unit • Matt Nord transitions from PE co-head to lead Hybrid Capital • → Credit no longer supports PE transactions • → Capital, talent, and incentives reallocated toward credit

Apollo’s shift toward private credit was enabled by a deliberate operating redesign: separating credit from buyouts and creating dedicated

teams to focus on scalable, repeatable deployment. Backed by Athene’s permanent capital and a deep origination network, Apollo can

underwrite large bilateral financings and compound spread income over long holding periods.