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Overview
The financial crisis of 2007 - 2008 permanently changed how the leveraged finance arms of investment banks operate. Regulatory guidelines enacted in response to the financial crisis and decisively limited the banks’ ability to lend to companies in risky sectors or finance risky leveraged buyouts to support their private equity clients.
As banks became more selective about the transactions they supported, Private Credit (i.e. Private Debt or Direct Lending) emerged to fill the significant lending gap that the investment banks left behind. Private Credit has grown to become one of the most important segments of the entire debt financing universe.
Despite the surge of popularity in private credit among young professionals, there are very few resources explaining how those interested in a career for private credit can navigate its mystifying recruiting process.
In this post, we will provide an overview of how recruiting for private credit works, discuss the similarities and intricacies compared to private equity recruiting, and provide a guide on how professionals from different career backgrounds can navigate the process.
Overview of Private Credit
Similar to private equity, recruiting for private credit is composed of 4 to 5 rounds of interviews, which include a round dedicated to a case study and/or model test. Interviews consist of technical, behavioral and fit questions, with technical questions being geared towards debt- or credit-related topics.
The recruiting season typically begins one year later than private equity, starting in late Fall of an analyst’s 2nd year, although many funds, especially smaller ones, will just recruit on a need basis. As such, we would estimate that Private Credit has more off-cycle recruiting opportunities than Private Equity.
Paths to Private Credit
The most common path to getting an interview at a private credit fund is through headhunters who usually reach out directly to analysts through your professional email.
The largest credit funds such as Carlyle, KKR (both Henkel), Oaktree (Amity) and GSO (SG Partners) rely on the headhunters they use for private equity recruiting. Many private equity mega funds have large credit arms. Regional or smaller funds (<$5B AUM) often post directly to job sites or use lesser known recruiters. When speaking with headhunters, make sure to have your story nailed down as to why you are pursuing private credit over private equity.
Opportunities are available to anyone working in investment banking, but the most common paths to Private Credit are candidates from:
Leveraged Finance or “LevFin” (origination, underwriting, execution)
Capital markets
Corporate / commercial banking
For those not currently in any of these fields, it is highly recommended that you lateral to one first in order to get related work experience and better access to recruiting pipelines.
For commercial and corporate banking analysts finding it difficult to get interviews, a common path is to transition into a LevFin group (whether internally or lateral) before recruiting.
Contrary to private equity, it is not uncommon to see analysts that were promoted to associates in investment banking also move to private credit.
Typical Credit Interview Questions
When preparing for Private Credit interviews, you should take special attention to understand your deals very well. You should be able to:
Explain in 30 seconds what the company does and how their business model makes money.
Know key stats of the transaction (size and interest rate on each debt tranche, leverage metrics) and business (EBITDA, cash flow/margin profile, etc.).
Discuss the investment highlights (what makes this company a good business to invest in?) and risk and mitigating factors (what risks could impact the business’ performance and how is an investor and the company’s cash flows protected?).
If it was a LevFin deal, know details of the syndication process and what investors were concerned with (if possible, check if the credit fund potentially looked at any of the deals you worked on).
If you have directly related experience, you will likely be asked about credit-related technicals, such as:
How do you calculate financial covenants (e.g. Fixed Charge Coverage Ratio)
How do you calculate all-in yield for term loan or bond?
Walk me from EBITDA to levered free cash flow
Walk me through a credit agreement
What is your view on the leveraged loan market?
If you have a corporate or commercial banking background, expect to be grilled more on technicals and what exactly your responsibilities were on deals. Some interviewers assume corporate bankers just manage client relationships and do not handle technical analysis like LevFin juniors, so the technical standard is often higher.
The Case Study / Model Test
The majority of Private Credit groups will administer a case study as the next portion of the interview process.
The case study will either be a take-home assignment or an in-person test. Take-home assignments are much more common during the off-cycle, while in-person tends to be more common during on-cycle due to the time constraints.
1. Take-Home
You will be given a CIM or presentation on a company and supplemental information including an industry report or excel files with large data sets that you will need to comb through.
You will have 2-3 days to prepare a presentation either in Word or PowerPoint format. It should outline the transaction situation, company and its business model, investment merits, key risks and mitigating factors, historical financial analysis, a projection model with multiple cases and most importantly, your recommendation on if you would do the deal or not (Hint: It’s okay to recommend not doing the deal as long as you can defend why).
You will present your memo in front of a group of people who work at the fund. Expect to be grilled on your thesis (Hint: even if it’s a stellar deal, people in the room will try to scrutinize your analysis to see how you handle pressure). You should also be prepared to talk through a downside case.
The idea is to simulate a real investment committee where decision-makers will ask very tough questions to make sure your thesis is air-tight before they approve your deal.
2. In-Person
This will be similar in structure, except that you will only have 3-4 hours to prepare and present your presentation at the fund’s office. Your write-up will be a slimmed-down summary of the take-home version, so 2-4 pages of analysis plus a short form cash flow projection model (i.e. no full balance sheet).
A case study is similar to the work you do during a credit underwriting process (i.e. putting together an 80-page memo and presenting it to the bank’s risk committee).
Every bank runs its credit processes differently, so if your group is not involved with credit underwriting, we suggest taking a CIM from a deal you’ve worked on and preparing your own investment memo.
Example of a Summary Cash Flow Model Output
Some funds may administer a separate model test depending on their investing mandate. Some firms only invest in first-lien term loans, while others invest all throughout the capital structure. Capital structure-focused funds often have higher technical standards and may have a more complex model assignment.
This involves building a full three-statement model from scratch within 2-3 hours using provided financial and capital structure assumptions. Expect to calculate credit ratios and run an IRR analysis if the fund invests in mezzanine or equity co-investments.
Conclusion
While the talent pool for Private Credit and Private Equity recruiting may be similar, the technical standards needed for Private Credit tend to be different. Not only do you have to build three-statement cash flow models, but you also need to be able to compute credit financial ratios, understand debt documents, and analyze individual tranches of debt. The interview fundamentals may be the same, but you may need to spend more time understanding the technical nuances.