What is private credit? Definition, how it works and examples
Loans made by funds instead of banks — how direct lending and the other private-credit strategies work, where the yield comes from, and what can go wrong.
The short answer
What is private credit? It is lending to companies by non-bank lenders — mostly funds — on terms negotiated directly with the borrower instead of through bonds or syndicated loans that trade. The loans are usually floating-rate, held to maturity, and carry covenants that let the lender act early when the borrower weakens. It matters to a private-market investor as the other half of the same companies’ balance sheets. Equity owns the upside; credit is paid first and earns a contracted rate.
What is private credit in finance, and how does it work?
The typical borrower is a middle-market company — too small or too leveraged for the bond market, and a borrower banks have become less willing to lend to. Many are owned by a private equity sponsor that is buying or refinancing the business. A private credit fund lends to it directly, often as the only lender or one of a small club, and keeps the loan on its own books. Price Floating rate: a base rate that resets with the market plus a fixed spread, so the coupon rises and falls with short-term interest rates. An upfront fee is often charged at closing.
What is direct lending, and what are the other private credit strategies?
Direct lending is the core of the market: senior, secured, floating-rate loans to sponsor-backed middle-market companies, sometimes as a single “unitranche” loan that replaces the separate senior and junior layers. The other strategies sit at different points on the risk curve. Direct lending Senior secured loans to established companies. The lowest-risk end of private credit, and the largest. Mezzanine Subordinated debt, often with equity warrants or a payment-in-kind coupon, sitting between senior loans and equity. Higher return, lower recovery in a default.
A worked example: where the yield on a direct loan comes from
A fund makes a five-year, $50 million senior secured loan to a sponsor-owned software company. The rate is a floating base plus a 5.5% spread, with a 2% upfront fee. The table shows one year, then the same loan if the borrower defaults. The floating rate cuts both ways. When the base rate rises the lender earns more — and the borrower, already highly leveraged, pays more out of the same cash flow. The IMF flagged exactly this in 2024: floating-rate debt to small, leveraged borrowers is the sector’s first vulnerability in a downturn.
What is private credit investing — funds, BDCs and interval funds?
Investors rarely lend directly. They buy into a vehicle that does, and the vehicle decides how often money can come back. Private credit fund A closed-end limited partnership. You commit capital, the manager draws it through capital calls as loans are made, and returns it as they are repaid, over a fund life of several years. Usually limited to accredited or higher-tier investors. Business development company (BDC) A closed-end fund regulated under the Investment Company Act that lends mainly to US private companies.
What is the private credit market, and what can go wrong?
The IMF put private credit at about $2.1 trillion worldwide in 2023, counting assets and undeployed commitments, with a focus on North America and Europe; managers based in the United States alone ran $1.6 trillion by June 2023. Its April 2024 report named four vulnerabilities: borrowers that are small, leveraged and floating-rate; the growth of semi-liquid funds that promise periodic exits from illiquid loans; leverage stacked at the borrower, the fund and the investor; and valuations that are infrequent and partly subjective, in a sector that has not been through a severe downturn at its cur…
The terms this page uses
Direct lending Senior, secured, floating-rate loans made by a fund straight to a company, usually sponsor-backed and mid-sized. Unitranche A single loan that combines the senior and junior debt layers at one blended rate. Maintenance covenant A financial test the borrower must pass every period — a leverage cap, for instance — breach of which lets the lender step in. Business development company (BDC) A regulated closed-end fund that lends mainly to US private companies, under a 70% qualifying-asset rule and a borrowing cap.
Questions about private credit
What is private credit and how does it work, in one paragraph? Funds raise money from investors and lend it directly to companies, mostly mid-sized and often owned by private equity. The loans pay a floating rate, are secured on the borrower’s assets and carry covenants. The fund holds them to maturity and passes interest and repayments back to its investors. What is a private credit fund? A vehicle — usually a closed-end limited partnership — that pools investors’ commitments and makes private loans.
What is private credit and how does it work, in one paragraph?
Funds raise money from investors and lend it directly to companies, mostly mid-sized and often owned by private equity. The loans pay a floating rate, are secured on the borrower’s assets and carry covenants. The fund holds them to maturity and passes interest and repayments back to its investors.
What is a private credit fund?
A vehicle — usually a closed-end limited partnership — that pools investors’ commitments and makes private loans. Money is drawn as loans are made and returned as they are repaid, over a fund life of several years.
How is private credit different from private equity?
Credit lends to a company and is repaid first at a contracted rate; equity owns the company and keeps whatever is left. The two often meet in the same deal, when a private equity buyer borrows from a private credit fund to finance the purchase.
Can individual investors buy private credit?
Through listed BDCs, which trade like shares, and through interval funds and non-traded BDCs with scheduled or discretionary repurchases. Private credit funds themselves are usually limited to accredited investors or higher-tier buyers.
Is private credit safer than stocks?
It ranks ahead of equity in the same company, so losses arrive later. It is not safe: borrowers default, recoveries are uncertain, prices are not visible, and the vehicle may limit when you can withdraw.
Where every rule and figure on this page comes from
Every rule and figure was checked against the primary source on 1 October 2026. The market-size figures are the IMF’s for 2023, the latest primary estimate opened for this page. For the equity side of the same companies, see what pre-IPO investing is.