Private credit has grown rapidly over the past decade, transforming from a niche corner of finance into one of the fastest-expanding areas of the private markets. Once dominated by traditional banks, lending today is increasingly provided by institutional managers and specialized credit funds that negotiate loans directly with borrowers. For investors and advisors alike, understanding what private credit is — and why it has become a core allocation in diversified portfolios — is essential.
Key Takeaways: Why Private Credit?
GROWING OPPORTUNITY
Private credit has grown rapidly in recent years to meet rising demand, fueled largely by companies seeking new sources of capital.
MANAGE DOWNSIDE RISK
Given its structure, private credit has the potential to provide an inflation hedge, predictable cash flow and lower volatility.
ENHANCE RETURN POTENTIAL
Because private credit investors commit capital for longer periods, they earn an illiquidity premium over public fixed income of similar credit quality.
Understanding Private Credit
Private Credit vs. Public Credit
Credit is foundational to the global economy. It helps individuals buy cars and houses and helps businesses access capital to expand into new geographies, offer new products and services, and acquire other businesses.
In traditional credit markets, individuals and businesses may approach banks for loans. Traditionally, businesses seeking larger loans have sought financing in syndicated markets, where a group of lenders work together to fund a single borrower. These can then often be traded on the public market.
In contrast, private credit typically consists of loans made outside of the traditional public banking system. In private credit (sometimes referred to as private debt), deals are directly negotiated between a borrower and a private lender. These do not involve a traditional bank and are not publicly traded on a listed exchange or public market. Companies seek out private lenders to support initiatives — like growth, acquisitions, etc. — for which traditional banks may not lend capital.
Types of Private Credit
There are many kinds of private credit investments, and each has its own potential benefits and risks, but we will be focusing primarily on the two pillars of private credit we have already mentioned: Direct Lending and Asset-Based Finance (ABF).
Direct Lending
Direct Lending is what many people think of when they think of private credit: loans made to corporations. These loans are typically senior in the capital structure, meaning investors are among the first to be paid, and tend to go to middle-market or upper-middle-market businesses.
Direct Lending investments typically:
- Carry floating interest rates, protecting against rising-rate environments.
- Are senior and secured, meaning they sit near the top of the borrower’s capital structure.
- Offer predictable income with lower mark-to-market volatility than public high-yield bonds.
Corporations themselves take on direct loans and are responsible for repayment. For direct lenders, the cash flows and overall financial health of a borrower are the most important factors to consider when originating loans.
Asset-Based Finance (ABF)
ABF is a form of non-corporate lending backed by a wide variety of collateral, including tangible and financial assets owned by corporations and individuals. Asset-Based Finance loans are secured by pools of assets that generate their own cash flows, such as:
- Auto loans
- Aircraft leases
- Consumer receivables
- Royalties
- Solar and renewable energy contracts
This approach provides investors with exposure to different parts of the economy and cash flows linked to a variety of collateral types.
Together, direct lending and ABF strategies offer complementary exposure — one focused on corporate lending, the other on hard or financial assets that can perform independently of broader market cycles.
Direct Lending vs. Asset-Based Finance
| ASPECT | DIRECT LENDING | ASSET-BASED-FINANCE |
| Collateral Type | Borrower's balance sheet / cash flow | Specific asset pools (leases, receivables, etc.) |
| Diversification | Company-specific | Diversified by the large number of assets in individual asset pools and at a portfolio level by the different sectors and types of collateral |
| Cash Flow Source | Operating income of a business | Contractual cash flows from assets |
| Risk Profile | Credit risk of a few borrowers | Structural / collateral-based risk |
| Typical Investor Objective | Yield enhancement | Stability, lower correlation to equities |
| Inflation Linkage | Indirect | Often direct via underlying contracts |
Other Common Private Credit Investment Strategies
Although Direct Lending and ABF are two frequent areas of focus, there are other strategies to consider.
Junior Debt
Subordinated loans made directly to businesses which sit between senior debt and equity
Capital Solutions
Bespoke lending to corporations that combines elements of both debt and equity with the expectation of higher returns than traditional senior debt holders
Distressed Debt
Lending to borrowers that are insolvent or in distress
How Does Private Credit Work?
Private credit is a suite of lending solutions designed to finance businesses, projects, and assets outside the public markets. At its core, the asset class is built on two pillars:
Corporate Direct Lending
A corporate borrower works with a non-bank lender to secure direct access to capital — typically an investor-funded vehicle. The loans do not trade publicly on any exchange or over-the-counter platforms between broker-dealers.
Asset-Based Finance (ABF)
Lending backed by tangible or financial assets like leases, receivables, or infrastructure projects. More on this in the ABF section below.
These strategies share a common foundation: direct negotiation between borrower and lender. That allows for customized terms, covenants, and collateral—an advantage that’s difficult to replicate in public markets. This works in the following ways:
Investors fund investment vehicles. In return, they receive regular interest payments and, at the end of the loan, principal repayment minus a management fee.
Private credit managers sit in the middle, sourcing investments from investors on the one hand and, on the other, lending directly to borrowers.
Borrowers who need capital negotiate bespoke terms directly with lenders, in this case the professional private credit managers. The borrowers repay this debt, issued in the form of private credit, through principal and interest.
Exhibit 1: How Private Credit Often Works in Practice
A Brief History
Exhibit 2: Growth in Global Private Credit Assets Under Management
The growth of private credit began in the wake of the Global Financial Crisis (GFC), when banks were forced to de-lever and new regulations placed restrictions on traditional bank lending. These restrictions included tighter supervision on leveraged lending and requirements to hold more capital in reserve against loans based on their perceived risk. As commercial banks pulled back on their lending activity and syndicated markets slowed to a crawl in the high-inflation period of 2022 and 2023, non-bank private credit stepped in to fill the void. It has since become a fixture of both borrower toolkits and investor portfolios. Global private credit assets under management are expected to reach nearly $3.1 trillion by 2030, as shown in Exhibit 2.
Volatility in broadly syndicated markets has also contributed to the rise of private credit. After the GFC, new leveraged loan and high yield bond issuance fell dramatically. A similar phenomenon occurred in 2022, when inflation and interest rates rose sharply. During these periods, even relatively large financings that would typically take place in the syndicated market went to private lenders as investors sought partners that could provide flexibility, speed of execution, and certainty. Over the last two decades, when capital from financial institutions has become harder to obtain, private lenders have increasingly been able to meet the need.
Similarly, as banks have often sought to shed existing loan portfolios to free up capital for new loans, the ABF market has grown rapidly. So too have corporations that provide financing to customers been an important source of growth. By 2029, the global private ABF market could reach $9.2 trillion (Exhibit 3).
Exhibit 3: ABF Is a Fast-Growing Market With Room to Run
Why Is Private Credit on the Rise?
Amid market volatility and the desire of many investors to diversify, private credit continues to be a fixture in many portfolios. The landscape has expanded as banks pull back on lending, and with the potential for consistent, compounding income, we believe private credit will likely continue its growth. The reasons include:
Income Potential
Private loans generally offer attractive cash yields, often exceeding those in investment-grade or high-yield bond markets. Plus, regardless of what’s going on with the rate cycle, private credit offers a yield advantage over time through both illiquidity (longer lock-up period) and complexity premiums (1:1 negotiation, bespoke terms).
Diversification Benefits
We see investors allocate to private credit as an alternative to traditional fixed income because of historically negative correlation with traditional fixed income (floating rate vs. fixed rate), offering scalable diversification benefits. Many private credit loans are floating-rate instruments, meaning income adjusts upward when benchmark interest rates rise. In inflationary or high-rate environments, this can help protect income levels. Meanwhile ABF loans are typically fixed rate, which creates the potential for investors to create private credit barbells similar to a combination of loans and bonds in fixed income, creating exposures to both floating- and fixed-rate assets to navigate through interest rate cycles. Private credit’s correlation to traditional equities and bonds is typically low, which can help smooth overall portfolio returns.
Downside Protection & Stability
Private Direct Lending loans often occupy senior-secured positions and are collateralized by company assets. In a default scenario, senior lenders have first claim on repayment. ABF assets are likewise collateralized in many cases by hard assets – commercial aircraft loans may be backed by the jets leased to airlines, for example.
How to Invest in Private Credit
There are multiple avenues available for individuals to access private credit investing and incorporate the asset class in their portfolios.
Private Credit Funds
Private credit funds are run by professional managers who source, select, and negotiate private loans. The investors then receive regular interest payments, plus principal repayment at the end of the loan.
Business Development Companies (BDCs)
A business development company (BDC) is another way for investors to access private credit assets. BDCs provide funding to companies of various sizes and are traded on public stock exchanges.
Evergreen Private Credit Funds
Evergreen private credit funds give investors ongoing access to diversified loan portfolios without the commitment of a closed-end fund. This structure enables investors to build long-term exposure to private lending while maintaining greater liquidity than traditional drawdown vehicles.
The Role of Private Credit in a Portfolio
In the traditional portfolio composed of 60% equities and 40% bonds, bonds historically provided income and ballast during equity downturns. However, with higher inflation and tighter monetary conditions, both asset classes have sometimes fallen simultaneously in recent years. Private credit emerged as a compelling option for diversification. Specifically, it has historically offered investors:
- Income generation via relatively high contractual yields
- Diversification through low correlation to public assets
- Potential inflation resilience through floating-rate exposure
Exhibit 4 details some of the characteristics of private credit compared to other popular asset classes.
Exhibit 4: Factor Analysis Can Empower Investors to Evaluate Asset Class Trade-offs, Informing Portfolio Construction Decisions
Private Credit vs. Traditional Fixed Income
Investors have traditionally valued publicly traded fixed income assets, such as bonds, as a predictable source of income and a buffer against the risk of volatility in publicly traded equities. Private credit may offer the potential for higher yield and increased investor protection through negotiated terms, covenants, and pricing.
| PRIVATE CREDIT | TRADITIONAL FIXED INCOME | |
|---|---|---|
| Market Description | Privately originated and held | Plublicly syndicated and sold |
| Traded | No | Yes |
| Coupon Payments | Yes | Yes |
| Coupon Structure | Typically floating rate in direct lending and fixed rate in ABF | Typically Fixed Rate |
| Credit Rating | Not Rated | Rated |
| Call Protection | Yes | Varies |
| Liquidity | Illiquid | Liquid |
| Valuation | Typically quarterly or monthly depending on the manager | Securities trade on public and OTC every day, though some publicly traded fixed income products do not trade frequently |
Private Credit vs. Private Equity
Alternative investments such as private credit and private equity provide a meaningful way for investors to diversify their portfolios beyond stocks and bonds. While both are classified as alternatives, and both provide capital to private entities, they do so in different ways. There are key differences between private credit and private equity that are important for investors to understand.
Private equity involves acquiring an ownership stake in companies that are not publicly traded on stock exchanges. Private equity investments are often long-term commitments focused on growth and eventually exiting the investment through a sale, merger, or IPO. The nature of private equity creates the potential for high returns, but there is also greater risk if the company does not perform.
Private credit is a loan that gets repaid, and tends to provide more predictable returns, which are established in the initial terms of the loan. There is lower risk involved, due to credit’s senior place in the capital structure, assuming the borrower does not default. And while the private credit market is growing, private equity remains considerably larger.
| PRIVATE CREDIT | PRIVATE EQUITY | |
|---|---|---|
| Ownership | No | Yes |
| Potential Returns | Lower, but predictable and stable | Higher, but with greater downside risk |
| Market Size | Smaller | Larger |
| Predictablity | More Predictable | Less Predictable |
| Liquidity | Illiquid | Illiquid |
Opportunities and Risks
Private credit has historically offered higher yields than many traditional fixed income assets. This is largely due to the illiquidity premium, or the higher return investors demand for investing in assets that aren’t easily bought and sold (Exhibit 5). Also, private loans tend to be highly bespoke in nature, with closely negotiated terms and covenants.
Exhibit 5: Though It Has Narrowed Due to Recent Market Volatility, the DL Illiquidity Premium is Still Robust
Compared to publicly traded equities, which also tend to have higher returns than fixed income products, private credit has historically delivered lower volatility. They also offer an effective way for investors to diversify their portfolios.
Like most investments, there are risks to consider. It’s important to understand how the seniority of individual private credit investments affects their potential risk and return (Exhibit 6). Seniority refers to the prioritization order in which investors are repaid in the event that a business or other borrowers comes under stress.
While private credit offers compelling attributes, investors should consider several key factors:
Illiquidity
Most private credit funds have limited redemption windows or multi-year holding periods.
Credit Risk
Borrowers may default, particularly in weaker economic conditions.
Valuation lag
Private assets are not priced daily, leading to slower mark-to-market adjustments.
Access requirements
Many strategies are available only to accredited or qualified investors.
Manager selection
Outcomes can vary significantly based on underwriting quality and risk management.
Exhibit 6: How Seniority Affects Risk and Return
It’s also worth noting that historical Direct Lending default rates have compared favorably to those of syndicated loans and, in some cases, high-yield bonds (Exhibit 7).
Exhibit 7: Historically, Default Rates for Direct Lending Have Been Low
Frequently Asked Questions
What is Private Credit?
Lending directly to businesses through privately negotiated loans—most often first-lien, senior-secured, floating-rate credit—plus lending against pools of assets (Asset-Based Finance). You’re acting like the bank, with more control over terms and protections.
What types of borrowers use Private Credit?
Primarily mid-market companies and originators seeking non-bank financing for loans collateralized by cash-generating assets.
How does it differ from traditional fixed income?
Private credit offers privately negotiated loans rather than public bonds, typically with higher yields, lower liquidity, and floating interest rates.
Why has Private Credit grown so much recently?
Post-GFC regulation and periods of volatility in broadly syndicated credit markets pushed banks to retrench, while private equity dry powder kept deal activity high— borrowers increasingly chose private lenders for speed, certainty and bespoke terms. As a result, the asset class has scaled rapidly.
What is Direct Lending?
Privately originated first-lien, senior-secured loans—typically floating-rate—to larger, sponsor-backed (PE-backed) companies; lenders lead underwriting and covenant packages.
What is Asset-Based Finance (ABF)?
Loans secured by diversified pools of financial or hard assets (e.g., consumer finance, commercial finance, hard assets, and contractual cash flows) that generate their own streams of cash flow. Historically, these credit offerings have provided diversification against both other types of credit and equity allocations.
How are private loans structured?
Generally senior-secured and collateralized, often with covenants. Many carry variable rates over the Secured Overnight Financing Rate (SOFR), and typical maturities run ~3–7 years. The structure aims to prioritize capital preservation and steady income.
What is Private Credit’s role in a portfolio?
A core income engine with mostly floating-rate, contractual cash flows, and a diversifier with low correlations to traditional bonds and equities—designed to complement core fixed income while targeting higher yields.
How risky is it?
Risks include borrower defaults and economic slowdowns, but seniority, collateral and covenants help. Also, it’s worth noting that historical Direct Lending default rates have compared favorably to those of syndicated loans and, in some cases, high-yield bonds (Exhibit 7). Long-run data show first-lien recoveries have averaged ~71% (median ~80%), and asset-class volatility has been lower than public high yield.
Explore Other Private Market Asset Classes
Dig deeper into the three other private market asset classes to learn what they are, why they matter, and how they may fit within existing portfolios.