Private credit is lending done by investment funds rather than banks or public bond markets. Funds negotiate loans directly with borrowers — most often private, middle-market companies — and investors earn the interest, fees, and structuring premium those loans carry. The asset class has grown into a multi-trillion-dollar market and one of the most widely allocated alternatives in advisor portfolios.
How the asset class works
Private credit occupies the space banks vacated. Post-2008 capital rules pushed banks away from leveraged and middle-market corporate lending just as institutional capital sought yield, and funds stepped into the origination role: sourcing borrowers, underwriting credit, negotiating terms, and holding loans to maturity. Because each loan is negotiated rather than syndicated to public markets, lenders can demand stronger economics — spreads above comparable public credit, upfront origination fees, prepayment protections, and covenants — in exchange for providing certainty and speed to borrowers. That negotiated premium plus an illiquidity premium is the return thesis.
The strategy family is broader than its largest member. Direct lending — senior loans to middle-market companies — dominates assets. Around it sit mezzanine debt (junior capital with equity kickers), distressed debt (buying troubled credits at discounts), asset-based lending (loans against collateral pools), specialty finance (royalties, litigation finance, equipment), and real estate credit via real estate debt funds. Most corporate strategies lend at floating rates, which is why the asset class’s income rose with rates in the 2020s — and why borrower interest coverage tightened at the same time.
What advisors should evaluate
Credit risk is the product. Yield spreads over public markets compensate for illiquidity and for taking concentrated, unrated middle-market credit exposure. Manager underwriting quality is nearly everything, and it’s only observable through cycles — default and recovery history, workout capability, and portfolio marks during stress (2020, 2022–2023) reveal more than pitch decks. Watch the same filing signals that matter in BDCs: non-accruals, PIK income share, and mark trends.
Access wrappers determine the experience. The identical strategy arrives as a listed or perpetual BDC, an interval fund, a private GP/LP drawdown fund with capital calls, or a feeder into an institutional vehicle. The wrapper sets liquidity (daily trading vs. capped repurchase programs vs. multi-year lockups), eligibility (accredited, qualified purchaser, or retail), tax packaging (1099 vs. K-1), and fee stacks. Matching wrapper liquidity to client need is as consequential as picking the manager.
Valuation is model-based. Loans without market quotes are fair-valued quarterly or monthly; smooth NAVs reflect that process, not absence of risk. Semi-liquid wrappers layering capped redemptions over illiquid loans work well in normal flows and prorate in stressed ones — the honest framing clients deserve upfront.
FAQ
What is private credit in simple terms?
Loans made by funds instead of banks. Investors in the fund collect the interest and fees that borrowers pay, in exchange for holding illiquid loans and bearing the credit risk.
How does private credit differ from private equity?
Private equity buys ownership; private credit lends. Credit sits higher in the capital structure with contractual income and lower expected returns; equity takes control and upside. Many managers run both.
How do individual investors access private credit?
Primarily through BDCs (listed and perpetual), interval funds, and — for eligible clients — private drawdown funds and feeders. Each wrapper trades access and liquidity differently.
Is private credit risky?
It’s credit risk plus illiquidity, concentrated in unrated middle-market borrowers and dependent on manager underwriting. Floating rates protect against rate moves but pressure borrowers when rates rise — risk migrates rather than disappears.
Related terms
Direct Lending · BDC · Mezzanine Debt · Distressed Debt · Interval Fund · Senior Secured Lending
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
