Private credit is lending to companies by investment funds and other non-bank lenders, negotiated directly with the borrower instead of being arranged by a bank and sold in public markets. The loans are usually held to maturity by a small group of lenders, are rarely traded, and pay a floating interest rate. Most borrowers are mid-sized businesses, many of them owned by private equity firms.
The term covers a family of strategies, of which direct lending is the largest. Private credit is distinct from public bonds and broadly syndicated loans, which are rated and traded, and from private equity, which buys ownership rather than lending. Because it channels credit outside regulated banks, supervisors treat it as part of non-bank financial intermediation, sometimes called shadow banking.
Private credit in plain terms
Most people picture a business loan as something a bank provides. Private credit is what happens when a pool of investors, such as pension funds and insurers, takes the bank's place. A fund manager collects their money, finds companies that need to borrow, agrees the terms face to face, and then collects the interest for the investors.
It is a bit like borrowing from a wealthy family friend rather than a high-street bank. The friend can decide faster and tailor the deal to your situation, but will usually charge more and may ask for more say in how you run things. The friend also cannot easily sell your loan to someone else, so both sides are tied together until the money is repaid.
How private credit deals work
A typical direct loan funds a buyout, an acquisition or growth spending. The lender carries out its own underwriting and often lends against the whole business, taking security over the company's assets as collateral. Common features include:
- Floating rates. Interest is set as a margin over a benchmark, in US dollar markets now SOFR, which replaced LIBOR.
- Unitranche structures. A single loan replaces separate senior and junior layers, which simplifies the deal for the borrower.
- Covenants. Lenders often set limits tied to leverage measured against EBITDA, giving them an early say if results slip.
- Payment-in-kind options. Some loans let the borrower add interest to the loan balance instead of paying cash, which eases pressure now but raises the amount owed.
Pricing and example
The interest rate on a floating-rate private loan is usually:
The base rate is the benchmark for the period, such as three-month SOFR, and the spread is the fixed extra margin the lender charges for the borrower's risk. Lenders often add an upfront fee and a floor below which the base rate cannot fall.
Suppose a company borrows $50 million at SOFR plus 5.5\% while SOFR is 4.0\%. The all-in rate is , so annual interest is dollars. If SOFR falls to 3.0\%, interest drops to $4.25 million. The spread over a comparable public loan, a form of credit spread, is what investors earn for illiquidity and complexity.
Growth of the market
Private credit grew strongly after the 2008 financial crisis, as tighter capital rules under Basel III and closer supervision made banks less willing to hold riskier loans to mid-sized companies. Low interest rates in the 2010s pushed investors toward higher-yielding assets, and fund managers stepped in. The International Monetary Fund estimated in its April 2024 Global Financial Stability Report that the global market had reached about $2 trillion, most of it in the United States.
Investors include pension funds, insurers, sovereign wealth funds, endowments and, increasingly, wealthy individuals. In the United States, many retail-facing vehicles are business development companies, a fund type created by Congress in 1980 to channel capital to smaller firms. Insurers also use private credit to back long-term policies, and some own or partner with the managers. Banks remain involved by lending to the funds themselves and by selling loans or securitization exposures to them.
Risks and regulation
The IMF and other supervisors have flagged several concerns:
- Opacity. Loans are not traded, so their values are set by the managers' own models and may be slow to reflect losses.
- Borrower quality. Borrowers tend to be smaller and more indebted than companies that issue public bonds, and many were hit by higher rates after 2022.
- Liquidity mismatch. Funds offering periodic redemptions to individuals hold assets that cannot be sold quickly, a form of maturity transformation.
- Links to banks and insurers. Leverage provided by banks and heavy insurer exposure could spread losses into the regulated system.
Supporters reply that private credit funds mostly use long-term, locked-up capital and modest borrowing, so they are less exposed to runs than banks, and that lenders work closely with borrowers when trouble starts. The IMF judged the risks broadly contained in 2024 but urged closer, more intrusive oversight, a theme picked up by bodies concerned with financial stability. Private credit funds are not banks, so they take no insured deposits; in the United States their managers are regulated mainly as investment advisers.