What is private credit? And why investors are paying attention
Private credit has grown rapidly in recent years as a more flexible option for debt financing—and investors have taken notice.
Reliable income is important to investors, but it can be hard to find when real yields are low. Similarly, businesses need a ready source of capital for growth and expansion, but banks just aren’t lending like they used to. And sometimes, companies need customizable terms with how they access capital not offered by bank loans. That’s opened the door for the growth of private credit.
What is private credit?
When you think of a loan, or “credit,” you might imagine putting on your best suit, walking into a bank, and applying for a car loan or mortgage. The bank runs your credit, it can take a while to get approved, and the terms can be somewhat inflexible.
Private credit’s different.
In short, private credit refers to the many types of privately negotiated loans between a borrower and a non-bank lender. Private credit enables borrowers to access capital with customized financing details, giving them more flexibility and speed of lending.
Private credit can be found on the balance sheets of banks as well as insurers, asset managers, pensions, and many others in the investor marketplace. Historically, institutional investors have invested in private credit seeking higher yields and lower correlation to stocks and bonds without necessarily taking on additional credit risk.1
Today, the addressable market for private credit is upwards of $40 trillion, most of it investment grade.2 Because private credit is just that—private—private credit investments often carry higher yields than public ones due to the customization the loans entail.
And private credit encompasses a broad universe of lending, which extends from direct corporate lending to asset-based finance (ABF).
Figure 1: Public versus private credit markets
How private credit works
The borrower—it can be a private or public company—privately negotiates with a non-bank lender on the terms of the loan. Private credit loans often contain a floating interest rate and are structured with customized terms unique to the borrower and lender. These are known as covenants—essentially the rules of the loan. Covenants are important to all of the parties involved:
- For the lender and investors, covenants act as a risk management tool, setting expectations for the borrower on the terms of the loan. For example, a covenant might be that the borrower can’t make a large acquisition or other significant strategic move that may threaten their credit quality without first receiving approval from the lenders.
- For the borrowers, covenants set clear expectations on the rules of the loan, and by agreeing to covenants, they can secure capital they may not have been able to through a traditional bank loan.
Historically, many investors may think of below investment-grade direct lending to middle-market companies when thinking about private credit. But as private credit has evolved and the scale of private capital providers has grown, funding structures and the types of companies accessing private credit have evolved, too.
Today, private credit includes funding structures such as ABF where loans are backed by collateral such as hard assets (including, for example, real estate, aircraft, and machinery), as well as financial and other assets (including, for example, media rights and music royalties). And borrowers from blue chip companies to small- and medium-sized enterprises may seek funding through private credit to support their capital needs.
Figure 2: Asset-based finance ecosystem
Why borrowers and investors turn to private credit
Private credit has emerged as a powerful way to access capital without tapping into public debt markets, attracting both borrowers and investors. Borrowers can get access to capital on more flexible and customizable terms, with potentially greater speed of execution. In turn, these private loans can potentially be attractive to investors because they can potentially offer more portfolio diversification and attractive yields relative to public debt markets.
Private credit enables borrowers and lenders to structure more tailored deals than is often possible with bank lending. Lenders and borrowers can work toward customized solutions. Borrowers may also acquire loans and financing faster than with bank lending—loans that investors can add to their portfolios.
Increased regulations and capital requirements that originated after the Great Financial Crisis, including Dodd-Frank and Basel III, made it harder for banks to extend loans.
With private credit, borrowers can access capital without diluting ownership.
Private credit can help borrowers access capital in situations that banks may avoid, like distressed debt, or in highly specialized strategies, like aircraft lease financing.
A pulse on the private credit market
While private credit isn’t new, the private credit market has been rapidly growing and attracting investment. Larger companies are increasingly turning to private credit markets for greater flexibility in loan structures or highly customized financing solutions to meet their long-term capital needs. Over the last decade, assets in private markets have nearly tripled,3 and growth is expected to continue. The potential addressable market for private credit is around $30T-40T.4
Opportunities and risks in private credit
Investing in private credit comes with its own unique potential benefits and risks.
Figure 3: Potential benefits and risk of private credit investments
| Potential benefits of private credit investments | Potential risks of private credit investments |
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Types of private credit investments
Different types of private credit investments have varying risk profiles and capital structures. These include, but are not limited to:
Figure 4: Types of private credit
| Type of private credit | Description |
| Direct lending and corporate financing | Loans provided by non-bank lenders to individual companies, which can include a range of financing structures (e.g. ABF) |
| Mezzanine debt | Debt that sits between senior loans and equity, often including equity, such as warrants |
| Distressed debt | Buying debt of financially troubled companies, with the potential for restructuring or liquidation recoveries |
| ABF | Loans secured by physical assets such as residential/commercial real estate, aviation equipment, music royalties, machinery, and other assets |
| Real estate private debt | Financing for real estate projects, including bridge loans, construction loans, and mortgage-backed debt |
| Specialty finance | Lending in niche areas like litigation finance, royalties, aircraft leasing, or trade finance |
| Structured credit (CLOs, ABS, etc.) | Investments in securitized loans, such as collateralized loan obligations (CLOs) or asset-backed securities (ABS) |
| Infrastructure debt | Financing for infrastructure projects such as energy and utilities |
How are private credit investments rated?
Despite being private, many private credit deals are rated by nationally recognized statistical rating organizations (NRSROs), just like many public credit securities. NRSROs rate private credit by assessing factors like borrower financials, collateral quality, and other factors of the deals. Although privately structured, much of private credit’s addressable market is investment grade, in part due to collateral backing and more customizable covenants.5
Compare public versus private credit investments
Public and private credit investments differ in these areas:
Figure 5: Traits of public versus private credit
| Public credit | Private credit | |
| Definition | Debt securities traded in public markets | Private loans negotiated between lenders and borrowers |
| Issuer | Governments, corporations (publicly traded) | Private companies including investment grade, middle-market firms, PE-backed firms |
| Pricing transparency | Public market-driven pricing, updated frequently | Not marked-to-market daily |
| Yields | Yields determined by public markets and interest rates | Often higher yields than public credit due to customization premium |
| Risk profile | More transparent risk profile | Risk often determined by risk profile of the borrower and the structure of the loan |
| Structure | Standardized terms | Customizable structures, more flexible |
| Regulation | Heavily regulated (SEC, FINRA, Fed oversight) | Less regulated, more flexible terms |
| Interest rate risk | Fixed rate public credit securities more subject to interest rate risk | Often floating rate, tied to benchmarks, price movements not as immediate |
| Ease of access | Easily accessible | More limited access, but growing with vehicles like exchange traded funds (ETFs), interval funds, and retirement solutions with target date funds |
Who invests in private credit?
Historically, investing in private credit has been limited to accredited investors and institutions including:
- Pension funds
- Insurance companies
- Family offices
- Sovereign wealth funds, and
- High-net-worth individuals.
Analysis conducted by the Federal Reserve found the majority of these investors sought out private debt for its potential portfolio diversification, low correlation to public markets, and relatively high returns/yields.6
But as the market has grown, calls for wider access to private markets have grown with it. Product evolutions like private credit ETFs and interval funds, as well as access via retirement solutions like target date funds, have begun to open up access to this booming asset class for all investors.
How to invest in private credit
There are several ways to access private credit investments for investors looking to add private credit exposure to their portfolios.
Private credit ETFs
Private credit-focused ETFs can deliver easy, transparent, cost-efficient access to the private credit market in a single trade—making it possible for all investors to access a market once available only to institutions and ultra-high-net-worth investors.
These ETFs are typically actively managed and deliver exposure to sectors of the private credit market in one of two ways:
1. By holding listed instruments that emphasize private credit, like business development companies (BDCs) or CLOs
2. By directly holding private credit
Pros: Low barrier to entry, can be bought and sold on secondary exchanges like stocks, potentially lower fees than a private credit fund
Cons: Investment types and yields are limited to what the ETF holds
Private credit funds
Private credit funds manage capital from multiple investors and provide loans to private companies. The managers of these funds will often source deals and include a variety of investments across different sectors and industries.
Pros: Active management can help manage risk and will often choose diverse investment exposures
Cons: Liquidity may vary and may require high minimum investments
Business development companies
BDCs are companies, often publicly traded, that invest in private credit through debt or equity in middle-market companies. Investors can gain exposure to private markets through investing in BDCs.
Pros: Publicly traded
Cons: Subject to market volatility and portfolio performance
Direct lending
For investors that can lend, direct lending gives them close access to the loans they want to carry in the private credit market.
Pros: High control over investments, direct access
Cons: Limited to accredited investors, requires structuring of deals
Private credit in the age of portfolio resiliency
Investor desire for added portfolio diversification, the retrenchment of bank lending, and borrower preferences for more customizable loans likely will continue to drive the expansion of the private credit market in the years to come. And increasing global capital demands to finance secular megatrends like the growth of AI and the energy transition will also require more diversified sources of capital, with private credit having a significant role to play.
The ability of a new generation of investors to access private credit exposures through tradeable, transparent, and cost-efficient vehicles like ETFs likely to propel the growth of this $40T potential addressable market even further.