Private credit · Global
Private credit explained
What lending outside the banking system involves, and what can go wrong.
Summary
Private credit means lending to businesses or projects outside traditional banks and public bond markets, with returns that come mainly from interest and fees.
- Loans are negotiated directly and are usually not traded.
- Risk depends on the borrower, the security and the loan terms.
- Higher stated yields usually reflect higher risk, not free money.
What is private credit?
It is lending that is arranged directly between lenders and borrowers rather than through banks or public markets.
Funds and investors lend to companies, property developers, or other borrowers. Loans are tailored, with terms agreed between the parties, and generally held until repaid. Examples include direct lending to mid-sized companies, asset-backed lending and real estate lending.
Why has it grown?
Borrowers wanted flexible financing and investors wanted income, while banks pulled back from some lending.
After banks tightened their balance sheets, non-bank lenders filled part of the gap. Growth brings its own risk, including competition for deals and looser terms in some cases.
What are the main risks?
The main risks are borrower default, weak security, valuation uncertainty and limited liquidity.
If a borrower cannot pay, recovery depends on the security taken, the ranking of the loan and the legal process, which can be slow. Floating-rate loans can become harder to service when rates rise. Leverage at fund level can magnify losses.
What should investors ask?
Ask who the borrowers are, what security backs the loans, how loans are underwritten and monitored, and what fees apply.
Look at how the manager has handled defaults and restructurings, and how loans are valued between repayments. Check concentration in a single borrower, sector or country.
Frequently asked questions
Is private credit safer than equity?
Lenders usually rank ahead of shareholders, but loans can still lose value or default, and capital remains at risk.
What is direct lending?
A lender making a loan straight to a borrower, rather than buying a bond or syndicated loan.
What is the difference between secured and unsecured?
A secured loan is backed by assets the lender can claim if the borrower defaults. An unsecured loan has no such claim.
Can I sell a private loan?
It is often difficult. There is usually no active market.
This article is general information for eligible investors. It is not investment advice or an offer. Capital is at risk. See our Terms and Risk warning.
