Private Credit: A Comprehensive Guide for Businesses and Investors

Private credit (also called private debt or direct lending) refers to loans made by non‐bank institutions – such as private equity firms, business development companies (BDCs), or alternative asset managers – directly to companies. Unlike public bonds or syndicated bank loans, these loans are negotiated privately and usually held to maturity by the lender. The asset class has exploded in size over the past decade: global private credit assets under management (AUM) have grown from a few hundred billion in the early 2010s to over $1.6 trillion by 2023 (sources – ubs.com). In the U.S. alone, private credit volumes swelled from just $46 billion in 2000 to roughly $1 trillion by 2023. This growth reflects both strong investor demand for higher-yielding, alternative income and borrowers’ appetite for flexible financing when traditional bank loans are constrained.

Key features of private credit: loans are typically floating-rate (indexed to benchmarks like SOFR), structured with rich covenants, and aimed at mid-sized or leveraged companies. Investors commit long-term capital, so private credit funds don’t rely on retail deposits – this makes private credit more “illiquid” and justifies higher interest rates. For example, private loans often carry spreads of 200–400 basis points above public rates to compensate for illiquidity. These deals tend to be covenant-heavy (to protect lenders), in contrast to looser “covenant-lite” public loans. In practice, a typical private loan might be $10–250 million for 3–7 years, although sizes have risen: recent data show the average private credit loan exceeded $80 million by 2022 – much larger than loans made by local banks.

Why Private Credit Is Growing

Private credit’s rise is driven by several factors. After the 2008 financial crisis, banks faced tighter regulation and capital rules. At the same time, bond yields plunged to record lows. Institutional investors (pension funds, endowments, insurance companies, family offices) seeking higher income turned to alternative debt. “With interest rates near zero, returns on government and corporate bonds were unattractive,” notes Brookings: this “reach for yield” pushed capital into private credit funds. In the U.S. alone, 28% of private credit fund capital comes from pension funds, 21% from endowments, and 19% from wealthy families.

Businesses also find private credit appealing. Compared to banks, private lenders often execute deals faster and customize terms. Borrowers benefit from upfront pricing, tailored covenants, and flexible amortization schedules. As Brookings observes, private funds advertise “their ability to provide loans to businesses quickly, on flexible terms, and with pricing available to borrowers upfront”. This is especially valuable for companies that are too small, unrated, or niche for public debt markets.

• Search for yield: In a low-rate environment, investors have flocked to private credit for its attractive spreads. Many large institutions now allocate part of their portfolio to this asset class (sources-reuters.com).
• Regulatory gaps: Stricter bank rules (Basel III, Dodd-Frank, etc.) have left a funding gap. Nonbank funds step in, rewiring capital markets and even “pulling” banks into supporting private lenders.
• Market volatility: During 2023’s credit market swings, many banks pulled back from syndicated lending, and private credit managers “stepped in to provide borrowers with stable funding”(sources-deloitte.com). This demonstrated the industry’s ability to act as an alternate lender of last resort.
• Portfolio diversification: Institutions value private credit for diversification. It provides exposure to corporate debt outside public markets, often with different risk/return profiles.

These drivers have combined to make private credit one of the fastest-growing corners of finance. As PwC reports, “the rise of the private credit ecosystem is causing a fundamental realignment in the debt value chain in capital markets”.

How Private Credit Works (vs. Traditional Loans)

Private credit is fundamentally non-bank lending. A firm (often backed by a private equity sponsor or seeking an acquisition) negotiates a loan directly with a private lender. Unlike a bank, the lender usually commits its own or investor capital and holds the loan on its balance sheet. There is no public issuance or broad syndication; indeed, private loans typically do not trade in liquid markets.

Key differences from traditional bank loans:

• Source of funds: Banks use deposits to fund loans, whereas private credit funds raise committed capital from investors. Banks often syndicate loans (selling pieces of a loan to other investors). Private credit funds generally hold loans to maturity. (In effect, banks themselves are significant backers of many private credit funds, via credit lines and co-investments.)
• Loan structure: Private loans are almost always floating-rate, meaning the interest resets periodically (often linked to SOFR or LIBOR). To protect lenders, these loans tend to have strict covenants on cash flow or leverage. By contrast, public corporate bonds or syndicated bank loans may be fixed-rate or covenant-lite.
• Size of borrower: Private credit typically targets mid-market companies (say $25M–$75M EBITDA, per Deutsche Bank). These firms may be unrated or below investment grade. In practice, though, larger corporations are increasingly tapping private debt too. Deloitte notes that non-bank lenders now handle loans averaging over $80 million, far above the usual bank-dependent loan size.
• Purpose of loan: Private credit is often used for leveraged buyouts, acquisitions, recapitalizations, growth capital, or refinancing. It can also include distressed debt purchases and specialty finance.

Each private credit deal is negotiated case-by-case. Lenders may combine senior debt, subordinated debt, or even mezzanine tranches in one package. They price the loan to include a substantial illiquidity premium – for example, spreads up to 400 basis points above bank benchmarks have been common. In exchange, borrowers get quick execution and often more flexible amortization or extension features than bank debt.

Figure: The private credit market has grown rapidly. Global private debt AUM has more than quadrupled since 2015, reaching roughly $1.6–1.8 trillion by 2024. Charts like this (from UBS Asset Management) illustrate the surge.

Benefits of Private Credit

Private credit offers advantages for both borrowers and investors:

• For Borrowers: It fills financing gaps. A business that can’t access a bond or full bank financing can often turn to private lenders. Borrowers get speed and certainty: deals can close in weeks, with fewer layers of approval. Lenders also permit more customization – e.g., inventory lines for manufacturers or holdbacks to manage working capital. Case studies show small firms using private debt to overcome collateral shortages and fund growth(sources- clearlyacquired.com).
• For Investors: Private credit provides attractive income. Because the debt is illiquid and higher risk, investors earn higher interest (often 6–10% or more in current markets). The loans also offer floating-rate protection against rising interest costs. Many investors value the “covenant-rich” nature of these loans, which can provide extra downside protection compared to unsecured bonds. Finally, private credit funds often have locked-up capital, so investors who can accept less liquidity can tap a unique return stream that is less correlated with public stocks or bonds.

Risks and Concerns

While the private credit market has grown rapidly, it is not without risks:

• Credit Risk: Borrowers in private credit tend to be highly leveraged or smaller than public issuers. Defaults and restructurings can be sizable (indeed, 2024 saw several high-profile sponsor-backed deals go into distress). Because loans are illiquid, losses can accumulate if portfolios sour.
• Illiquidity: Investors in private credit must lock up capital for multi-year terms. There is no public trading market to easily exit positions. During market stress, this illiquidity premium is a double-edged sword.
• Systemic Links: Regulators worry about the linkages between banks and private credit funds. In the U.S., banks often provide the financing that capitalizes BDCs or credit funds. If a large private lender took big losses, it could feed back through credit lines to banks. Federal Reserve researchers note that much recent PC growth has been funded indirectly by banks – “extensive links” that could transmit stress. However, so far official analysis (FRB, IMF, Fed Boston) suggests the financial-stability risk has been moderate because many deals are sensible “capture of market share” rather than wildly riskier lending.
• Rising Rates: Higher interest rates mean higher funding costs and can strain borrowers. While private credit loans are floating-rate (so lenders get paid more in a high-rate regime), highly leveraged companies may struggle to service debt, increasing default risk. That said, if rates stay elevated, private credit investors generally enjoy fatter coupons – which partly explains why, even after several Fed rate hikes, demand has stayed strong(sources- deloitte.comubs.com).

Regulatory watchers are paying attention. For example, the U.K. Bank of England recently highlighted that private credit had quadrupled since 2015 (to an estimated $1.8T by 2024) and noted much of that came in a low-rate era. Policymakers ask whether, in a downturn, private credit could amplify shocks. As the PwC report warns, the sector’s much larger scale today means “if defaults rise… there could be a systemic feedback loop” to the broader economy.

Private Credit Around the World

Private credit is a global market, though with regional differences. The U.S. remains the largest by far – roughly 40% of global private credit funds focus on U.S. companies. Europe is the second-biggest market, driven by pension capital and an active mid-market. Asian private credit is still nascent but growing: JPMorgan recently noted APAC private credit deals total roughly $200 billion annually (versus a $1.5T public debt market), implying big room to expand(sources- reuters.com).

• United States: Banks’ share of U.S. corporate lending has shrunk (e.g. from 44% in 2020 to 35% by 2023), while non-bank credit grew rapidly. The U.S. direct lending funds have become substantial; one analysis found U.S. private credit reached nearly $1T in 2023.
• Europe: Although still smaller than in the U.S., private debt is booming in Europe. Regulators report that many mid-cap firms now finance acquisitions and buyouts via private debt funds. For instance, in 2024 CapitaLand (Singapore) acquired Wingate’s private credit arm, signaling Asian capital flowing into European credit markets(sources- alternativecreditinvestor.com).
• Asia-Pacific: Many economies here remain bank-centric, but change is underway. Big global banks (e.g. JPMorgan, Goldman) are launching private credit platforms, targeting companies and infrastructure in Australia, India, and Southeast Asia (sources:-reuters.com). Analysts estimate the Asia-Pacific private credit opportunity is still relatively small (the industry has grown from $0.5T to $2T globally over a decade(sources- reuters.com), so many view it as a growth region.

Figure: Deal size distribution in private credit. Larger and mid-size transactions now make up a significant portion of direct lending. UBS data (2024) show that the private credit market is accommodating increasingly big loans. This reflects the trend that “private credit loans have become larger” and more similar to big syndicated loans.

Case Studies and Examples

Practical examples illustrate private credit’s role:

• Acquisition financing: In the middle market, private credit often bridges gaps in acquisitions. For example, a specialized tech services company in North America wanted to buy a $4.2 million competitor. Banks declined the deal because of the target’s complex IP assets. Instead, a private credit fund stepped in with a tailor-made financing package, making the acquisition possible (sources – clearlyacquired.com).
• Growth capital for SMEs: A manufacturing firm sought to expand production but lacked traditional collateral. Through an online private lending platform, it secured a customized loan package (combining senior and subordinated debt) with payment terms matched to its seasonal revenues. This helped boost capacity and revenue after the deal (sources – clearlyacquired.com).
• Large-scale buyouts: Private credit now even finances multimillion-dollar buyouts. Since 2020, direct lenders have backed more leveraged buyouts than the syndicated loan market. In 2024 some of the largest deals were financed by private credit funds rather than banks.

Big industry consolidations also underscore private credit’s momentum. In late 2024 BlackRock agreed to acquire HPS Investment Partners for $12 billion(sources– alternativecreditinvestor.com) (giving BlackRock a top-tier credit business). Similarly, Ares Management bought GLP Capital Partners for $3.7 billion (adding $44 billion AUM)(sources – alternativecreditinvestor.com). Firms like Blue Owl, Stonepeak, and others have snapped up credit managers worldwide. These moves highlight how financial institutions are investing heavily to build out private lending platforms, anticipating continued demand.

Future Outlook

All signs point to further growth. BlackRock projects private credit will exceed $3.5 trillion by 2028, potentially surpassing today’s combined leveraged loan and high-yield bond markets. The “addressable market” is enormous – some analyses even cite figures like $30 trillion when counting non-investment grade borrowing globally. Key factors for the coming years include:

• Economic cycles: If markets soften, private credit’s resilience will be tested. So far funds proved steady in 2020–2023 downturns, but scale and linkages have since risen. Lenders’ emphasis on covenants may help mitigate losses, but defaults could attract regulatory scrutiny.
• Interest rates: Elevated rates boost returns for lenders, but they also pressure borrowers. Funds will need disciplined underwriting to ensure loan covenants (e.g. interest coverage ratios) hold up.
• Innovation: Managers are expanding into secondaries, real estate loans, and sustainability-linked debt. For example, specialized private credit funds are now financing renewable energy projects and even consumer loans.
• Bank partnerships: Traditional banks will continue to adapt. Some are creating their own direct lending arms; others finance private funds. This cooperation vs. competition dynamic will shape how widely private credit penetrates the market.

In summary, private credit is much more than a niche today. It has become a mainstream source of capital for companies worldwide. Borrowers appreciate its speed and flexibility, while investors value its yields. However, participants must be mindful of higher risk and complexity. The sector’s rapid growth means it will likely remain in the spotlight of investors, corporates, and regulators alike in the years ahead.

Sources: Industry reports and research from federal regulators, investment banks, and finance media provide the data above clearlyacquired.com alternativecreditinvestor.com, ensuring our discussion reflects the latest market intelligence.

This article is for informational purposes only and should not be considered personalized investment advice. Always consult with qualified financial professionals before making investment decisions.