Private Credit
I joined a dinner this evening hosted by a prominent private credit lender.
I got into a fairly in-depth conversation with one of their team about how private credit works: what the incentives are, how they underwrite, what they focus on, etc.
It's obvious in hindsight, but I found it quite striking how different the focus is for them vs. the venture capital world.
In venture capital, the downside is of limited importance. Sure, we try to protect against bad outcomes with a liquidation preference, anti-dilution, and so on, but it's not where the money is made. In other words, we don't get paid for the downside. For us, there is no realistic scenario where the downside case materialising is a good thing. In a world that's mostly binary, the upside is all that matters.
For the private credit guys, it's the opposite. As my dinner companion put it: "I don't care about your upside." That's not where they make their money, after all (putting aside the fact that some private lenders, but not this one, take warrants to gain some upside exposure too). For them, the downside - whilst not the 'Plan A' outcome they underwrite against - may not actually be all that bad. Lenders sit at the top of the stack, often with claims on the assets if they can't be repaid. The downside creates an opportunity to extract more value from the situation. It might even, perversely, end up as a positive.
Clearly both entrepreneurs and capitalism at large benefit from different types of capital providers offering to fund companies at different stages under different conditions with different structures. If there wasn't value being created by the various participants in the capital markets, then they simply wouldn't exist as nobody would use them. There is no "right" or "wrong", nor "good" or "bad" - just different.
That said, I couldn't help reflecting in the taxi home how pleased I am to be on the side that focuses on - and benefits from - the upside. It may even be a worse way to make money, but it's a fundamentally better fit with how I see the world and where I want to spend time.