What is private credit?
Private credit is debt provided by non-bank funds rather than by banks or the public bond and syndicated-loan markets. The loans are privately negotiated between borrower and lender, are not traded on an exchange, and are typically held to maturity. It is the credit-market analogue to private equity: capital raised in funds and deployed into privately arranged deals.
The category grew sharply as banks pulled back from leveraged lending after the financial crisis and as institutional investors sought yield. Today private credit is a major financing source for mid-market and increasingly large leveraged buyouts, often competing directly with the broadly syndicated loan market for the same deals.
It is an umbrella term. Direct lending — senior and unitranche loans made straight to companies — is the largest piece, but private credit also spans mezzanine debt, distressed and special-situations lending, asset-based finance, and other strategies. What unifies them is the private, fund-based, illiquid nature of the capital.
How private credit works
The model mirrors private equity in structure and incentive.
- Raise a fund. A credit manager raises capital from institutional investors — pensions, insurers, endowments — into a closed-end or evergreen vehicle dedicated to lending.
- Originate privately. The fund negotiates loans directly with borrowers, often sponsor-backed companies, setting pricing, structure, and covenants bilaterally.
- Fund and hold. The loan is funded from the vehicle's capital and held to maturity rather than distributed, so the fund carries the full credit exposure.
- Earn the spread. Returns come from interest income — a spread over SOFR plus fees — and the manager takes a management fee and a share of the returns, much like a PE carry.
Why borrowers and investors use it
For borrowers, private credit offers speed, certainty of execution, confidentiality, and a single relationship lender willing to underwrite complex or smaller credits the syndicated market would shy from. The cost is a higher spread, reflecting that the lender holds illiquid risk it cannot sell down.
For investors, it offers higher yields than comparable public debt and floating-rate exposure, in exchange for illiquidity — capital is locked up and the loans cannot be readily sold. The defining trade-off across the whole category is illiquidity for yield. Because these loans are held privately and managed bilaterally for years, keeping each facility's terms, covenants, and performance documented and current is essential to managing the position through its life.