Credit Funds are closed end Private Equity funds that focus on credit rather than equity investments. Credit funds typically invest in non-liquid and hard to value credit instruments. The number of credit funds managers has increased dramatically in the past decade as traditional lenders such as banks were not supplying the needed credit to all types of borrowers and because institutional investors wanted to diversify their portfolio to include credit instruments.
Credit funds are structured similarly to Private Equity funds, yet some Credit funds have clauses that separate them from traditional private equity funds in two important areas:
- Some credit funds allow continuous investment like open-end funds. This allows investors to inject money occasionally and not commit a definite amount of capital when the fund is raising capital.
- Some credit funds aim to generate current income rather than capital appreciation. These funds distribute their revenue on a monthly or quarterly basis.
Debt strategies include Direct lending, Opportunistic situations, Distressed debt, Structured credit, and Specialty finance. Credit managers use these strategy headers to highlight their investing focus:
- Direct lending focuses on lending directly to middle market companies.
- Opportunistic funds pursue a flexible approach of allocating credit.
- Distressed debt seeks companies in distressed situations.
- Structured credits funds are backed by pools of loans such as residential mortgages, commercial loans, or consumer loans.
- Specialty finance is a broad definition of anything that is outside the banking sector or a regular course of lending.
Credit funds offer a great way to diversify portfolios to debt and fixed income instruments. Some credit funds are a good way to create current income while maintaining or slightly increasing the value of their investment.