Private Credit: The Alternative to Bank Loans and Public Bonds

Private credit, also known as direct lending, is a large and rapidly growing area of finance. Most people haven't heard of it, even though it's significant. Non-bank lenders, organized as private credit funds, provide loans directly to companies. They often operate outside traditional bank loans or public bond markets. This growth stems from a specific origin: post-2008 banking regulations. Increased capital requirements for traditional banks made certain types of lending, particularly to smaller and mid-sized companies, less attractive or more costly for banks. This created a gap, and non-bank private credit funds have stepped in to fill it over the years.

The typical private credit borrower is a middle-market company. These companies are larger than very small businesses that rely on traditional banks but smaller than the largest public companies that can access public bond markets easily and cheaply. They often seek private credit for financing acquisitions or refinancing existing debt. They work directly with a private credit fund to negotiate loan terms individually. It’s a different process from issuing standardized, publicly traded corporate bonds.