Private Law Theory

ABSTRACT
This paper aims to provide new insights into the role of modern debt (credit) capital in the firm, its relationship with equity (share) capital, and the implications of advances in debt markets for corporate finance and corporate governance. The thesis of this paper is that the role of debt and its relationship with equity in the firm, due to recent significant developments in the corporate finance markets after the global financial crisis of 2007-2008, has been transformed. The relatively new, but already very experienced non-traditional providers of debt finance, such as private credit funds, are aggressively competing with traditional finance providers, such as commercial banks, in a dynamic market which is full of unforeseen and large-scale risks.

To the best of our knowledge, this is the first academic paper in law to examine private credit funds and to compare them to commercial bank financing. The paper challenges the traditional legal and financial framework of corporate finance and corporate governance and shows that modern debt providers (i) do participate in capital growth, (ii) are interested in the firm’s profit maximisation, (iii) there is not always a conflict between the interests of equity and debt providers in the firm, and (iv) corporate loan financing agreements are often expected to be renegotiated (repriced). Based on developments in the corporate finance markets, the paper argues that outside financial distress, often debt and equity simply can no longer exist in a vacuum from one another. The reliance of private credit funds on private (contractual) bargaining can also improve the economic efficiency.

Lalafaryan, Narine, Private Credit: The Evolution of Corporate Finance and The Firm (October 2, 2023), University of Cambridge Faculty of Law Research Paper No 25/2023.