Chapter 4: Beyond Equity - Private Debt and Real Assets
Most people think of private equity as just owning a piece of a company. But the “private markets” universe is much bigger than that. It also includes two other major categories: Private Debt and Private Real Assets.
Private Debt: Being the Bank
Sometimes a company doesn’t need a new partner; it just needs a loan. But since the 2008 financial crisis, regular banks have become much more cautious. They often won’t lend to small or medium businesses that they consider “risky.”
This is where private debt funds come in. They act like a non-bank lender. They provide:
- Direct Lending: Simple loans for healthy, growing companies.
- Mezzanine Debt: A hybrid between a loan and equity. It’s riskier for the lender, but it often comes with “warrants” (options to buy shares later).
- Distressed Debt: Buying the debt of a company in trouble, often with the plan to convert that debt into ownership and fix the business.
Private Real Assets: Investing in the Physical World
This is about owning “stuff” rather than just “companies.” It’s divided into a few main areas:
- Real Estate: Buying offices, warehouses, or apartment buildings.
- Infrastructure: This is the big stuff—toll roads, ports, airports, and even fiber-optic networks. These are great because they often have a local monopoly and provide steady, predictable cash flow for decades.
- Natural Resources: This includes things like timberland, farmland, and energy production (oil, gas, and renewables).
The cool thing about real assets is that they often provide a hedge against inflation. If prices go up, the value of the land or the toll on the road usually goes up too.
So, while venture capital and LBOs get all the headlines, these other parts of the market are just as important. They provide the steady “income” that many big pension funds need to pay their retirees.
In the next post, we’re moving into Chapter 5 to talk about the most important part of any deal: the people.