Private Credit

Private credit funds raise money from institutional investors, such as pension funds, insurers and endowments, and lend it directly to companies, often mid-sized businesses or companies owned by private equity firms.

Private credit includes several strategies: direct lending, the largest; mezzanine debt, which sits between senior loans and equity; distressed debt; asset-based lending; and specialty finance.

The market has grown rapidly since the 2008 financial crisis, as stricter regulations made banks more cautious about certain types of lending. It has become a significant alternative to bank loans and high-yield bonds, with total assets measured in trillions of dollars.

For example, a private equity firm buying a software company might borrow from a private credit fund rather than a group of banks, because the fund can provide the loan quickly, with certainty and flexible terms.

Private credit typically offers investors higher returns than publicly traded bonds, usually through floating interest rates. However, loans are illiquid and not regularly priced by markets. Regulators and central banks have raised concerns about the sector’s rapid growth, limited transparency, links with banks and how its loans would perform in a severe downturn.