What Is Private Credit? The Hidden Side of Lending

Imagine this:

A small/medium size company is looking to scale up their operations, maybe they want to open more stores, but they don't qualify for a traditional bank loan, or banks just aren’t lending to businesses like theirs anymore (typically because a bank may see smaller sized companies as too risky). It's at this point where they turn to a private credit fund. These funds are managed by people who collect money from investors and lend it directly to businesses.

It’s kind of like if you wanted to buy a new bike, but your parents say no because they don’t think it’s the right time or don’t want to give out more money. That’s when you might turn to a generous friend who’s willing to lend you the money instead. In the business world, that generous friend is like a private credit fund.

Private credit has become super popular, especially since 2008, when increased regulation forced banks to start being a lot more careful about who they lend to. Now, private credit funds have over $1.7 trillion in assets worldwide!

Now that you have a background and base understanding of how these funds operate, let's look at all involved parties involved to see what their specific roles are and how they benefit from private credit.

How does it benefit the business?

Small and medium-sized companies may not get loans from big banks. But with private credit, they can still:

• Open new locations

• Buy equipment

• Hire more workers

Why it helps them:

• They get fast, flexible loans without all the strict rules banks usually have.

How does it benefit investors?

Investors put their money into private credit funds. Then, those loans get paid back later on with interest. Here, the investors earn a return, which is sometimes higher than what they’d get from stocks or bonds, as this is riskier than investing in an established company or a government bond, for example.

Why it helps them:

• Simply put, they earn higher returns in exchange for taking on more risk.

How does it benefit private credit firms?

Private credit firms manage the whole process, collecting money from investors and lending it to businesses. They do research to find good companies to lend to, keep track of the loans, and most importantly, charge management fees and interest margins

Why it helps them:

• They earn money from fees and prove they’re smart lenders, which helps them attract more investors in the future.

How do you get involved?

There are a few ways to gain exposure to private credit. The easiest is probably through Private Credit ETFs, which let you invest in private loans with a single stock-like trade. Additionally, you could invest in Business Development Companies, which are publicly traded companies who focus on lending to private firms.

Final Thoughts

Private credit is growing and it's here to stay. Preqin's Future of Alternatives 2029 Report estimates it to to soar to $2.6 trillion in AUM (assets under management) by 2029. This means more businesses will be relying on private credit for growth, and more investors like you may consider it as part of your portfolio.

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Do you think you'll explore investment options for private credit in the future? Let us know down below!