Brattle Principal Farooq Javed and Ohio State Professor Isil Erel Examine Risk and Value in Private Credit
In a new article published in Law360, Brattle Principal Farooq Javed and Ohio State University Professor of Finance Isil Erel offer a new framework for understanding risk and value in private credit. They argue that lending that appears to be debt can carry equity-like risk when repayment and recovery depend heavily on a borrower’s future enterprise value.
That distinction can have important consequences when private credit investments become the subject of litigation, restructurings, or regulatory scrutiny, including for the signals that should prompt a reassessment of value and the judgments required to perform one.
The article, “Rethinking Risk and Value in Private Credit Disputes,” highlights how repayment, recovery, and valuation can operate differently in private credit than in more conventional lending frameworks.
Key insights from the article include:
- Academic research finds that private credit fund cash flows reflect a combination of debt and equity risk factors, rather than debt risk alone.
- Private credit borrowers often differ from traditional commercial borrowers, with limited current cash flow and few tangible assets available to support repayment and recovery.
- Private credit structures can reflect those borrower characteristics, with repayment and recovery depending more heavily on future enterprise value and creating a different risk dynamic from traditional cash-flow lending.
- That risk dynamic can make value more sensitive to factors typically associated with equity–including growth, competition, technological change, financing conditions, and exit opportunities–and may require different skills and judgments to value the debt.
