What private credit is and why it’s growing fast
Private credit refers to debt financing provided to companies by non-bank lenders rather than traditional commercial banks or the public bond market. These lenders may include private-credit funds, asset managers, private equity firms, and hedge funds. The loans are privately negotiated, illiquid, not broadly syndicated or traded, and tailored to the borrower’s needs.
The appeal of private credit has grown rapidly in recent years. On the supply side, banks have reduced lending to middle-market and non-standard borrowers due to stricter regulation and capital requirements. On the demand side, borrowers increasingly seek flexible, bespoke capital structures that traditional lenders or public markets cannot provide efficiently.
For investors, private credit offers a differentiated risk-return profile: higher yields relative to traditional loans or bonds, low correlation with public markets, and floating-rate structures that can act as an inflation hedge.
Private credit vs. other debt channels
To understand private credit’s place within corporate finance, it helps to compare it with traditional channels such as bank lending and public debt.
Bank lending has long been the main source of financing for businesses. Banks, however, are constrained by regulation and standardised underwriting frameworks. Private credit lenders, by contrast, can move faster, negotiate bespoke terms, and lend to companies with more complex or unconventional credit profiles.
Public debt includes corporate bonds or syndicated loans that trade in public markets. These instruments provide liquidity and transparency but require standardisation and are sensitive to market volatility. Private credit sits between the two: less liquid than public debt but more flexible and often higher yielding than bank loans.
Private credit differs in several ways:
- Negotiated terms tailored to the borrower
- Limited or no public trading, providing an illiquidity premium
- Focus on middle-market or niche borrowers
- Floating-rate coupons
- Stronger lender protections and covenants
- Direct lending by non-bank institutions
Private credit has emerged as a bespoke alternative for companies and a differentiated yield source for allocators.
The capital stack explained
Capital structure positioning defines the risk, yield, and protections of a private credit investment.
Senior debt
Senior debt has priority in repayment during liquidation or bankruptcy. It usually holds first-lien or pari-passu status, with amortisation schedules and collateral backing. It carries the lowest default risk and therefore offers the lowest yield within the capital stack.
Mezzanine debt
Mezzanine sits behind senior debt but ahead of equity. It combines debt features such as interest payments with potential equity participation through warrants or conversion rights. Mezzanine is common in leveraged buyouts or recapitalisations and carries higher yields to compensate for its lower repayment priority.
Distressed credit
Distressed credit involves loans to companies under financial stress or in default. It presents higher risk but also potential for outsized returns through restructurings, asset recoveries, or equity conversions. Specialist managers often target this segment.
Understanding where a loan sits in the capital stack is critical. Senior secured loans may yield modestly above benchmarks, while mezzanine or distressed credit can deliver higher returns with significantly greater risk and illiquidity.
Key strategies within private credit
Several lending strategies fall under the private credit umbrella, each with distinct risk and return characteristics.
Asset-based lending (ABL)
Loans are secured by specific assets such as receivables, inventory, or equipment. This provides downside protection but requires detailed diligence to assess asset quality and recovery value.
Venture debt
Venture debt is issued to growth-stage, venture-backed companies that seek additional capital without equity dilution. These loans may include warrants or other equity kickers. The strategy carries more risk than senior lending but allows exposure to high-growth sectors.
Special situations lending
This strategy focuses on financing unique or event-driven needs, such as restructurings, M&A transactions, or corporate turnarounds. The loans are highly bespoke and often higher yielding. They require deep expertise and active involvement by lenders.
Collateralization and structure
The structural design of private credit deals is central to understanding their risk profile.
Secured vs. unsecured loans
Secured loans are backed by collateral, giving lenders claim over specific assets in case of default. Unsecured loans rely on the borrower’s creditworthiness and therefore carry higher yields. Most middle-market private loans are secured.
Covenants and protections
Private credit loans often include covenants covering leverage, interest coverage, and dividend restrictions. These contractual protections allow lenders to monitor performance and intervene early if necessary. Because loans are privately negotiated, covenant quality can vary widely.
Floating vs. fixed rates
Many private credit instruments feature floating-rate coupons, which can adjust upward when interest rates or inflation rise. This feature is especially relevant in volatile macro environments and helps maintain yield levels when base rates change.
For investors, structural details such as lien priority, covenant strength, and rate type are as important as headline returns.
Why allocators care
For institutional investors, family offices, and private-capital allocators, private credit offers compelling attributes when managed prudently.
Yield
Private credit typically provides higher yields than traditional fixed income. Senior direct lending strategies have recently delivered double-digit annualised returns, outpacing public credit and approaching equity-like performance.
Diversification
Because private loans are illiquid and privately negotiated, their returns are less correlated with public markets. This can enhance portfolio diversification and generate an illiquidity premium for long-term investors.
Inflation resilience
Floating-rate structures allow income to adjust as base rates move, providing some protection against inflation. This has made private credit particularly attractive during recent rate cycles.
Structural tailwinds
As banks continue to withdraw from certain lending segments and private companies remain private for longer, non-bank credit fills a growing gap. This secular trend supports sustained investor demand and continued market expansion.
Risks and considerations
Private credit offers opportunity, but it also introduces meaningful risks that investors must evaluate carefully.
Liquidity risk
Private credit investments are typically illiquid and may lock investors into multi-year holding periods. Limited secondary markets can make it difficult to exit positions or mark them to market during periods of stress.
Default and credit deterioration
While many loans are senior and secured, defaults can still occur, particularly among smaller borrowers or riskier strategies such as mezzanine and special situations. Rapid market growth has also led to some loosening of covenants, which increases credit risk.
Valuation opacity
Private loans are not traded on exchanges, making valuation less transparent. Investors rely on manager reporting and internal pricing models, which can delay recognition of losses.
Interest-rate and macro sensitivity
Rising rates may increase borrower costs and pressure cash flows, even as yields rise for investors. Economic slowdowns can also raise default rates and reduce recoveries.
Manager selection
Outcomes vary significantly across managers. Strong underwriting discipline, workout experience, and operational oversight are essential to preserving returns and managing downside risk.
Private credit is not a substitute for traditional fixed income but rather a higher-yielding, less liquid complement that requires careful sizing and monitoring.
Market outlook
The outlook for private credit remains positive. Global assets under management surpassed USD 1.6 trillion in 2024 and are projected to reach USD 4.5 trillion by 2030. In the United States alone, the addressable market may exceed USD 30 trillion, with private credit currently representing about one fifth of that opportunity set.
The asset class has grown at a compound annual rate above 13 % over the past decade, driven by bank retrenchment, demand for flexible capital, and investor appetite for income-oriented alternatives. Nearly all institutional investors now include private credit in their portfolios, reflecting its maturation into a core allocation.
Going forward, growth will likely moderate as competition compresses spreads and underwriting discipline becomes a key differentiator. The next phase of development will hinge on manager quality, governance, and investor sophistication rather than market momentum.
