Private Debt Interview Questions: Complete Guide
Master private debt and direct lending interviews. Learn credit analysis, covenant structures, debt capacity, and structuring with 20+ questions and interactive practice.
Private debt (also called direct lending or private credit) has become one of the fastest-growing segments in alternative investments. With over $1.5 trillion in AUM globally, private debt funds provide financing to middle-market companies that sit between traditional bank loans and public debt markets.
If you're preparing for private debt interviews, you need to master a different skill set than private equity. Instead of focusing on equity upside, you're analyzing credit risk, downside protection, and debt structuring. This guide covers the essential concepts and questions you'll face.
Why Private Debt Interviews Are Different
Unlike PE interviews that focus on growth and returns, private debt interviews emphasize risk mitigation and loss avoidance. You'll need to think like a lender, not an equity owner—focusing on covenant protection, recovery scenarios, and cash flow stability over upside potential.
1. Private Debt Fundamentals
What is Private Debt?
Private debt refers to loans and debt instruments that are not publicly traded. Private debt funds (direct lenders) provide financing to companies, typically in the middle market, offering an alternative to traditional bank loans and public bonds.
Private Debt Landscape
| Term | Definition | Note |
|---|---|---|
| Direct Lending | Loans directly to companies, typically $25M-$500M | Most common form of private debt |
| Mezzanine | Subordinated debt with equity kickers (warrants/PIK) | Higher returns (12-18%), sits between senior debt and equity |
| Distressed Debt | Buying debt of struggling companies at discounts | Opportunistic, targets 15-25% returns |
| Venture Debt | Debt to VC-backed startups alongside equity rounds | Specialized niche, typically smaller facilities |
Private Debt vs Private Equity
Private Debt vs Private Equity
| Aspect | Private Debt | Private Equity |
|---|---|---|
| Position | Lender (creditor) | Owner (equity) |
| Returns | Interest + fees (8-12%) | Capital appreciation (20%+) |
| Risk/Reward | Lower risk, capped upside | Higher risk, unlimited upside |
| Protection | Covenants, seniority, collateral | Board control, management |
| Focus | Downside protection | Upside creation |
| Time Horizon | 5-7 years to maturity | 5-7 year hold period |
Test Yourself
Interview Question
A company's EBITDA declines by 20%. How does this impact private debt vs private equity investors?
Understanding how debt and equity investors think differently is fundamental to credit analysis. Practice analyzing credits from a lender's perspective.
2. Credit Analysis Fundamentals
Credit analysis is about answering one question: Will this borrower be able to repay the debt? Unlike equity analysis where you forecast upside, credit analysis focuses on downside scenarios and default probability.
Key Credit Metrics
The 4 Essential Credit Ratios
1. Leverage Ratio (Debt/EBITDA)
Measures total indebtedness relative to earnings. Net Debt/EBITDA is most common (subtracts cash).
• Investment grade: 1-3x
• Direct lending: 3-5x
• Highly leveraged: 5x+
2. Interest Coverage (EBITDA / Interest)
Measures ability to cover interest expense. Key metric for debt service capacity.
• Strong: >3.0x
• Adequate: 2.0-3.0x
• Weak: <2.0x
3. Fixed Charge Coverage
(EBITDA - CapEx) / (Interest + Mandatory Amortization)
More conservative—includes CapEx and debt paydowns, not just interest.
4. Debt Service Coverage Ratio (DSCR)
Operating Cash Flow / Total Debt Service
Measures actual cash available vs all debt obligations. Used heavily in real estate and project finance.
Test Yourself
Interview Question
A company has $50M EBITDA, $200M total debt, and $30M cash. What is the Net Debt/EBITDA ratio?
Test Yourself
Interview Question
A company has $60M EBITDA and $25M annual interest expense. What is the Interest Coverage Ratio, and is this acceptable for a direct lending deal?
Net Debt/EBITDA = (Total Debt - Cash) / EBITDAThe most widely used leverage metric in credit analysis. Net debt removes cash since it can immediately pay down debt.
Interest Coverage = EBITDA / Interest ExpenseMeasures how many times EBITDA covers annual interest. A company with 2.0x coverage can see EBITDA drop 50% before it can't cover interest.
3. Covenant Structures: The Lender's Protection
Covenants are contractual restrictions in credit agreements that protect lenders by limiting borrower actions and providing early warning signals of distress. Understanding covenant structures is critical for private debt interviews.
Maintenance vs Incurrence Covenants
The most important distinction in covenant structures is between maintenance and incurrence covenants. This fundamentally determines how much control lenders have over the borrower.
Test Yourself
Interview Question
Which statement correctly describes the difference between maintenance and incurrence covenants?
Common Maintenance Covenants
Financial Covenants (tested quarterly):
- Maximum Leverage: Net Debt/EBITDA ≤ 4.5x
- Minimum Interest Coverage: EBITDA/Interest ≥ 2.5x
- Minimum Fixed Charge Coverage: (EBITDA - CapEx)/(Interest + Amortization) ≥ 1.25x
- Maximum CapEx: Annual CapEx ≤ $10M or % of revenue
What happens when breached:
- Event of default—lenders can accelerate debt (demand immediate repayment)
- In practice: negotiate amendment (waiver + fee + stricter terms)
- Gives lenders leverage to tighten terms or demand equity
Common Incurrence Covenants
Only tested when taking specific actions:
- Debt Incurrence: Can't raise additional debt if Pro Forma Leverage >4.0x
- Restricted Payments: Can't pay dividends if Leverage >3.5x
- Acquisitions: Can't acquire companies unless Pro Forma Coverage >2.0x
- Asset Sales: Must use proceeds to pay down debt if Leverage >4.0x
Key difference: If you don't take the action, covenant doesn't matter. Gives borrower more flexibility.
4. Debt Capacity Analysis
A critical skill in private debt is determining how much debt a company can support. This involves analyzing cash flows, understanding covenant restrictions, and sizing debt to appropriate leverage and coverage levels.
Two Approaches to Sizing Debt
Leverage-Based Sizing
Maximum Debt = Target Leverage × EBITDA
Example: $100M EBITDA, 4.0x target leverage → $400M max debt
Pros: Simple, market-standard, easy to communicate
Cons: Doesn't account for cash flow needs, CapEx, or actual debt service
Coverage-Based Sizing
Maximum Debt sized to achieve target coverage ratio
Work backwards from required Interest Coverage or DSCR
Example: $100M EBITDA, need 2.5x Interest Coverage, 10% interest rate
- Max Interest = $100M / 2.5x = $40M
- Max Debt = $40M / 10% = $400M
Pros: Ensures actual debt service capacity
Cons: More complex, sensitive to interest rate assumptions
In practice, debt is sized using BOTH approaches—whichever is more constraining determines the actual debt capacity. You also need to consider:
- CapEx requirements: High CapEx reduces cash available for debt service
- Working capital needs: Growth consumes cash through working capital
- Seasonal volatility: Revenue seasonality affects covenant compliance
- Covenant cushion: Never size right to covenant—need buffer for downside
Test Yourself
Interview Question
Company has $80M EBITDA, $15M CapEx, $20M interest expense, and $10M mandatory debt amortization. What is the Fixed Charge Coverage Ratio?
Test Yourself
Interview Question
A company generates $100M EBITDA. Using a 4.0x Net Debt/EBITDA constraint, how much additional debt can it raise if it currently has $300M debt and $50M cash?
5. Private Debt Market Landscape
Direct Lending vs Syndicated Loans
Understanding the differences between direct lending (private debt) and syndicated loans (broadly syndicated leveraged loans) is essential for positioning your interest in private debt.
Test Yourself
Interview Question
What is a key advantage of direct lending (private credit) over syndicated loans from a borrower's perspective?
Where Private Debt Sits in the Capital Structure
| Term | Definition | Note |
|---|---|---|
| Revolver | Working capital line, first lien, L+200-300 bps | Lowest cost, most senior |
| First Lien Term Loan | Amortizing loan, first lien, L+450-650 bps | Core of direct lending |
| Second Lien | Junior secured, L+700-900 bps, often with PIK | Higher returns, more equity-like risk |
| Mezzanine | Subordinated unsecured, 12-18% cash + PIK + warrants | Highest debt returns, closest to equity |
Key Players
The private debt market includes a range of participants:
- Large private debt funds: Ares, Owl Rock (Blue Owl), Golub Capital, Oaktree, Apollo
- BDCs (Business Development Companies): Public vehicles investing in private debt, permanent capital
- Opportunistic credit funds: Distressed debt specialists like Centerbridge, Silver Point, Apollo
- Banks: Still provide senior secured lending but pulled back from middle market post-2008
Why Private Debt Has Grown
Private debt AUM has grown from ~$300B in 2010 to over $1.5T in 2024:
- Bank retreat: Post-2008 regulations (Dodd-Frank, Basel III) made bank lending less attractive
- Yield hunger: Institutional investors (pensions, insurance) seek yield in low-rate environment
- Sponsor demand: PE firms prefer certainty and flexibility of private debt vs syndicated loans
- Floating rates: Most private debt is floating rate (SOFR + spread), protecting against rate increases
- Lower defaults: Private debt default rates historically lower than high-yield bonds due to tighter covenants
6. Private Debt Interview Strategy
Common Interview Questions
Technical Questions You'll Face
- "Walk me through how you analyze a credit"
- "What are the key metrics you look at?"
- "Explain maintenance vs incurrence covenants"
- "How do you size debt for a company?"
- "What's the difference between first lien and second lien?"
- "How do direct lending returns compare to PE returns, and why?"
- "Tell me about a credit you've analyzed"
- "What makes a good private debt investment?"
- "How would you handle a covenant breach situation?"
How to Structure Your Credit Analysis Answer
When asked "How do you analyze a credit?", structure your answer:
1. Business Quality
- Market position, competitive dynamics, customer concentration
- Industry trends and secular growth/decline
- Management quality and sponsor track record
2. Financial Analysis
- Leverage ratios (Debt/EBITDA)
- Coverage ratios (Interest Coverage, FCCR)
- Cash flow stability and seasonality
- Working capital dynamics
3. Downside Scenarios
- "What if EBITDA declines 20-30%?"
- Can the company still service debt and stay in covenant compliance?
- Recovery value analysis (asset-based lending value)
4. Structure & Documentation
- Seniority and collateral package
- Covenant structure (maintenance vs incurrence)
- Pricing relative to risk
Emphasize downside protection and risk mitigation—not upside capture like PE.
Fit Questions
Why Private Debt Over Private Equity?
Have a clear answer for why you're interested in debt vs equity:
Good answers focus on:
- "I prefer the analytical rigor of credit analysis and focus on downside protection over growth scenarios"
- "I'm drawn to current income generation and the contractual nature of debt returns"
- "Private debt offers strong risk-adjusted returns with less volatility than equity"
- "I like the puzzle of structuring transactions to protect lenders while enabling borrowers"
Avoid:
- "PE is too competitive" (sounds like you're settling)
- "Better work-life balance" (may not be true, and signals wrong priorities)
- "I don't like equity risk" (sounds risk-averse in a bad way)
Key Takeaways
Key Takeaway
- Think like a lender, not an owner: Focus on downside protection, not upside capture
- Master the key ratios: Leverage (Debt/EBITDA), Interest Coverage, and Fixed Charge Coverage
- Understand covenants: Maintenance covenants (tested quarterly) provide stronger protection than incurrence covenants
- Debt capacity analysis: Use both leverage-based and coverage-based approaches; whichever is more constraining wins
- Market positioning: Private debt offers certainty and flexibility vs syndicated loans, at a higher price
- Interview preparation: Have 2-3 credits you can discuss, emphasize risk analysis over growth stories
Common Mistakes to Avoid
- Forgetting to use Net Debt: Always subtract cash when calculating Debt/EBITDA unless specified otherwise
- Confusing maintenance and incurrence: Maintenance = tested quarterly, Incurrence = only when taking actions
- Sizing debt right to covenant: Always need cushion for EBITDA volatility
- Talking about upside in credit interviews: Focus on downside protection and loss mitigation
- Not considering CapEx in coverage: Fixed Charge Coverage accounts for CapEx; Interest Coverage doesn't
Continue Your Private Debt Interview Prep
Build on these credit fundamentals with these related guides:
- LBO Explained Simply — Understand how PE firms use debt in buyouts (related structuring concepts)
- Enterprise Value vs Equity Value — Master the bridge between equity and debt (essential for credit analysis)
- How the 3 Financial Statements Link — Build accounting foundations for credit analysis
- Walk Me Through a DCF — Understand cash flow projections (critical for debt sizing)
- Top 20 PE Interview Questions — See how credit thinking differs from equity thinking