Private credit refers to loans or debt financing provided by non-bank lenders to companies or individuals. Unlike traditional bank loans or publicly traded bonds, private credit transactions occur in private markets and are not accessible to everyday investors through public exchanges.
Key Characteristics
Non-Bank Lending: Private credit is provided by specialized investment funds, asset managers, or direct lenders rather than traditional banks.
Illiquidity Premium: Investors typically earn higher returns compared to public debt markets because their capital is locked up for longer periods.
Flexible Terms: Private lenders can offer more customized loan structures tailored to borrower needs, including flexible covenants and repayment schedules.
Direct Relationships: Lenders often work directly with borrowers, enabling better monitoring and more nuanced risk assessment.
Types of Private Credit
- Direct Lending<: Senior secured loans to middle-market companies
- Mezzanine Financing: Subordinated debt with equity participation rights
- Distressed Debt: Loans to companies facing financial difficulties
- Specialty Finance: Niche lending such as asset-based, real estate, or consumer credit
Why Private Credit?
For borrowers, private credit offers access to capital when traditional banks may be constrained by regulation or risk appetite. For investors, it provides attractive risk-adjusted returns with lower correlation to public markets.
The private credit market has grown to over $1.5 trillion globally, driven by bank deleveraging after 2008, investor appetite for yield, and the flexibility these instruments provide.