Relating responsible investment to private debt

It is difficult to generalise about implementation of responsible investment in private debt as the latter comprises so many different investment strategies.

Instead, we have identified the main characteristics of various private debt strategies. In the section A framework for responsible investment in private debt we explain how these characteristics relate to different responsible investment approaches.

Figure 9: key characteristics of various private debt strategies

Private debt strategy/type	Description	Typical credit rating	Flexibility of terms	Stakeholders(excluding borrower)	Availability of public ESG data and related ESG research	Extent of lender influence	Level of liquidity
Leveraged loans	Loans made to companies typically to finance acquisitions, mergers and leveraged buy-outs by private equity sponsors and other leveraged owners.	High yield	Fixed	Multiple investors	Good for public companies	Medium	Average
Private placement	Unlisted debt securities typically issued by investment-grade (and occasionally sub-investment grade) companies to a select group of investors. Structured as bonds, notes or loans.	Investment grade/high yield	Fixed	Multiple investors Deal arranger	Poor for private companies	Low	Illiquid
Syndicated loan	Loans arranged by banks or other entities on behalf of a single borrower, offered to a group of lenders (a syndicate).	High yield	Fixed	Multiple investors Deal arranger	Poor for private companies	Low	Illiquid
Unitranche	A hybrid loan structure that combines senior debt and subordinated debt risk into one single senior loan with a blended interest rate, without the use of intermediaries such as banks.	High yield	Flexible	Single or small number of investors	Poor for private companies	Medium	Highly illiquid
Distressed debt	Investments in debt of entities in financial distress with the expectation of participation in the upside of the entity recovering.	High yield	Flexible	Single or small number of investors	Poor for private companies	Medium	Illiquid
Public debt/Bonds	Debt instruments which are tradeable on an exchange. Issuers include government-related entities, banks, corporates and special purpose vehicles (SPVs) created to finance projects or asset pools.	Investment grade/high yield	Fixed	Multiple investors	Good for public companies	Low	Liquid
Corporate direct lending	Loans to conservatively managed mid-sized companies made on a bilateral basis without the use of intermediaries such as banks. Every deal has a unique negotiated structure.	Investment grade/high yield	Flexible	Single or small number of investors	Poor for private companies	Medium/low	Illiquid
Mezzanine debt	A hybrid of debt and equity financing that is comprised of subordinated to senior debt.	High yield	Fixed	Single or small number of investors	Poor for private companies	Medium	Highly illiquid
Infrastructure debt	Typically long-term project-type debt investments used to finance development, upgrades or ongoing maintenance of infrastructure assets.	Investment grade	Fixed	Multiple investors	Poor for SPVs	Medium	Liquid
Real estate debt	Typically long-term project-type debt investments used to finance development, upgrades or ongoing maintenance of property assets.	Investment grade	Fixed	Multiple investors	Poor for SPVs	Medium	Liquid