What private credit is

Private credit means loans to companies made and held by lenders that aren't banks: investment funds, insurance companies and specialist finance companies. The loan is negotiated directly between the lender and the borrower (or a small group of lenders), kept by those lenders until it's repaid, and never traded on an exchange.

Most of it goes to mid-sized businesses, often called the middle market: companies too big for a local bank's loan but too small, or too unusual, to sell bonds to the public. A typical borrower might be a regional distributor, a software company or a chain of clinics, often owned by a private equity firm.

The market grew a great deal after the 2008 financial crisis. Banks faced stricter capital rules and guidance on risky loans, so they held fewer loans to mid-sized, highly borrowed companies. Funds stepped into that gap. At the same time, years of low interest rates sent investors looking for higher income, and these loans paid more than bonds of similar quality. Borrowers liked the speed, certainty and the chance to deal with one lender who knew them.

The money comes from long-term investors: pension funds, insurance companies, university endowments and foundations, sovereign wealth funds, wealthy families and, more recently, individuals through funds built for them. They like it because the income is contractual, usually floating rate (it rises when interest rates do), and senior in the company's capital structure. In return they accept that they can't easily sell: the extra yield for that is called the illiquidity premium.

sofr, spread = 0.0425, 0.0575   # base rate and the lender's margin
loan = 50_000_000
rate = sofr + spread
print(f"{rate:.2%}", round(loan * rate))

How it differs: a bank loan is often syndicated, split into pieces and sold to many investors, and the largest ones (broadly syndicated loans) trade between investors every day. A bond is a public security with standard terms, usually a fixed rate and few or no financial covenants. A private loan is negotiated, usually floating rate, often has covenants the lender checks every quarter, and the lender has a direct relationship with the company when things go wrong.