Private credit — sometimes called private debt — refers to loans negotiated directly between a borrower and a lender (or a small club of lenders) rather than issued into public bond markets or distributed through broad bank syndicates. The lenders are usually asset managers investing on behalf of institutions: private credit funds, business development companies (BDCs), insurance accounts, and separately managed accounts.
The defining feature is bilateral negotiation. Instead of a rated, registered security that trades among many holders, a private credit loan is a contract tailored to one borrower. Terms — pricing, maturity, covenants, reporting, prepayment protection — are set in direct negotiation, and the lender typically expects to hold the loan to maturity.
The largest strategy within private credit is direct lending: senior secured loans to companies, most often businesses backed by private equity sponsors. Other strategies include mezzanine and junior capital (debt that sits below senior loans in the capital structure), opportunistic and special-situations lending, asset-based finance (lending against pools of receivables, equipment, or other assets), and real estate or infrastructure debt.
Why do borrowers choose private credit over a bank loan or a bond? The most cited reasons are speed and certainty of execution (one counterparty, no syndication or ratings process), confidentiality (no public disclosure), flexibility (structures such as delayed-draw term loans or payment-in-kind toggles can be negotiated), and access — many middle market companies are too small or too story-driven for the public markets.
The trade-off is cost. Private credit loans generally price at a premium to comparable broadly syndicated loans, reflecting illiquidity and the lender's underwriting work. Most are floating-rate instruments priced at a spread over a benchmark rate such as SOFR, which is why the asset class's yields move with central bank policy.
For lenders, the appeal is a contractual, floating-rate income stream, seniority and security in most strategies, and covenants and information rights that are often tighter than those available in public markets. Middle market direct loans more frequently retain financial maintenance covenants — tested quarterly — than large broadly syndicated loans, where covenant-lite structures dominate.
The main structural risk discussions around private credit focus on illiquidity (loans cannot easily be sold), valuation (holdings are marked by models and boards rather than daily market prices), borrower concentration in sponsor-backed, levered companies, and the growth of leverage at fund level. Regulators, including the Federal Reserve in its Financial Stability Report, monitor the sector's rapid growth, its ties to insurers, and the migration of lending activity outside the banking system.
A note on vehicles: BDCs are a common wrapper for U.S. direct lending. They are closed-end investment companies regulated under the Investment Company Act of 1940 that must invest primarily in private or thinly traded U.S. companies and distribute most of their income. Some BDCs are publicly traded; others are non-traded or private. Interval funds, private funds, and insurance balance sheets round out the lender base.
When reading coverage of the asset class, three vocabulary items recur. "Unitranche" is a single loan facility that blends what would traditionally be senior and junior debt into one instrument with one blended rate. "Club deal" is a loan provided by a small group of direct lenders rather than one. "Dry powder" is committed but not yet deployed investor capital — a gauge of competitive pressure on loan terms.