Decent Exposure? Rethinking Private-Equity and Credit Cross-Investment

Private-credit funds often provide the “leverage” in leveraged buyouts (LBOs), raising the risk of unintended exposure for limited partners invested in both credit and private-equity strategies. We find that this overlap is smaller than commonly assumed, however, and downside protections appear robust, suggesting that private-credit and equity positions in the same company are surprisingly diversifying.

Using MSCI Private Capital Transparency data on investments in more than 800 jointly financed companies, we explore the extent to which private-credit and buyout funds are exposed to the same portfolio companies, how those exposures evolve over time, and whether they result in similar performance. Our findings point to modest, inconsistent overlap across these private-capital strategies, as well as limited return correlation between the two.

In sponsored deals, where a private-credit fund lends to a private-equity-backed company, the buyout fund bears the bulk of the exposure, on average. In our data, 85% of net asset value (NAV) resides in buyout, compared to just 15% in private credit.¹

This imbalance reflects fundamental differences in strategy. Buyout funds take controlling stakes, making it more likely that the equity portion of a deal will be captured in its entirety. Credit financing, by contrast, is more often fragmented across private-credit funds, but potentially across banks, business-development companies (BDCs), hedge funds and other lenders too. This analysis captures only private-credit funds’ participation in deals. 

As a result, we find that private-credit exposure to these sponsor-backed companies is material but much smaller than buyout exposure to the same companies. While a representative LBO might be 50% debt, private-credit lending represents a much smaller fraction of LBO NAV when averaged across private-capital funds and over time. 

NAV attributable to private-credit and buyout funds across sponsored and non-sponsored deals. The darker blue and green bars represent the jointly financed deals in our analysis. 

For companies jointly financed by credit and buyout funds, the relative size of those exposures diverges meaningfully as investments age. Private credit’s exposure is front-loaded in a deal’s life and declines steadily thereafter as loans amortize or get refinanced. In contrast, buyout’s exposure tends to grow, in both relative and absolute terms, as the equity position appreciates.

Private-credit NAV as a fraction of combined credit and buyout NAV in jointly financed portfolio companies, as a deal ages. NAVs are pooled by holding vintage and strategy.

At inception, private credit rarely accounts for more than one-third of NAV in jointly financed companies. That share steadily declines over the life of the deal, leaving the equity stake as the primary source of exposure — that is, private credit’s exposure to these sponsored deals is both smaller and shorter-lived than buyout’s. Any analysis of cross-strategy concentration due to duplicate exposures should account for the transience of that exposure. 

Even when cross-exposures are significant, volatility in private-credit performance is muted compared to buyout. The asymmetry between credit and equity returns is unsurprising: Equity takes the upside — but also first losses. Still, it’s important to quantify this asymmetry, which provides valuable insight into the extent of the downside protections in private credit.

Deal-level returns for buyout funds vs. private-credit funds participating in the same deal. When buyout returns are positive, relatively little of that passes through to private-credit lenders — the slope of the blue line is just 0.237. Private-credit funds participate more in the downside (slope of 0.446), but this implies a recovery rate of approximately 82%.

When buyout funds lose money — that is, post a total value to paid-in multiple (TVPI) below 1.0 — credit returns typically decline much less, if at all. Even for quite poorly performing buyout positions, private-credit TVPIs in the same deal generally remain positive or only slightly negative. 

This is not just a validation of credit’s downside protection — it’s a window into how much capital is preserved when things go wrong. In our data, the average sponsored loan began to take losses only when the buyout position had lost nearly 60% of its value; and, in the event of a complete write-off for the buyout investment, the private-credit lender recovered more than 80% of its investment, on average.² This average recovery rate greater than 80% compares favorably to more liquid credit instruments, such as leveraged loans, high-yield bonds and investment-grade bonds.

Exposure analysis should not stop at shared company names or aggregate NAV — allocators must understand how return asymmetries play out in good deals and in bad. Private-capital investors may have common company exposures across their portfolios, but the same name doesn’t always mean the same risk or the same return. Avoiding overexposure requires not just identifying overlap but understanding how that overlap behaves when it matters most.