Private Credit

Private credit is financing provided to companies by non-bank lenders through privately negotiated loans rather than publicly traded bonds. In corporate financing, it generally refers to debt supplied by specialised funds or other non-bank investors, with lending terms negotiated directly with the borrower.

How private credit financing works

A private credit fund pools investors' money and lends it to companies. It assesses the borrower's repayment capacity, negotiates the loan agreement and monitors the business throughout the loan's life.

• Investors can include pension funds, insurance companies and other institutional or wealthy investors seeking income from lending.
• Companies use these loans to finance expansion, acquisitions, refinancing or other business requirements.
• Loan agreements specify interest payments, repayment dates, security and covenants, which are conditions intended to protect lenders.
• Many loans carry floating interest rates, so the borrower's interest cost changes with a benchmark rate.
• Investors commonly commit capital for several years because the underlying loans cannot readily be sold.

How it differs from other financing sources

Private credit expands the range of financing available beyond bank loans, public bonds and equity. Its distinguishing features are the non-bank lender and the privately negotiated, relatively illiquid loan.

• Unlike a conventional bank loan, private credit is supplied by a non-bank lender, although banks may finance or otherwise have exposures to private credit funds.
• Unlike a publicly traded bond, a private loan generally has a limited secondary market and terms tailored to a particular borrower.
• Unlike private equity, private credit creates a repayment obligation rather than primarily providing ownership capital; lenders generally rank ahead of shareholders if the company fails.

Benefits and risks

For companies, private credit can offer flexible financing where bank lending or public bond issuance is difficult. However, flexibility does not necessarily mean cheaper borrowing.

• Direct negotiation can provide greater certainty of execution and repayment structures suited to the borrower's needs.
• Investors may earn higher returns as compensation for credit risk, complexity and illiquidity, but repayment is not guaranteed.
• Borrowers face debt-servicing pressure, particularly when floating interest rates rise or business earnings weaken.
• Limited public disclosure and infrequent trading can make loan quality and valuations harder to assess.
• Connections with banks and institutional investors can transmit losses beyond individual funds, making sound underwriting, monitoring and oversight important.