Private credit, also known as direct lending, involves non-bank financial institutions providing loans to businesses, typically small and mid-sized enterprises that may not have access to traditional bank loans or public bond markets. This form of credit is privately negotiated between the borrower and lender, often offering more flexible terms and faster execution compared to traditional bank loans.
Private credit has become a significant asset class, especially since the 2008 financial crisis, as banks have reduced their lending activities due to stricter regulations. This has opened opportunities for private credit funds and alternative asset managers to fill the gap. The market has grown rapidly, with private credit assets under management reaching over $1.6 trillion by March 2023, and projections suggest it could exceed $3.5 trillion by 2028.
Investors are attracted to private credit due to its potential for higher yields compared to traditional fixed-income securities. The loans are typically floating rate, which can benefit lenders in rising interest rate environments. However, private credit investments are generally illiquid, as they are not traded on public markets, and they often involve holding the loans until maturity or refinancing.