Private Credit
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Private credit is an asset defined by non-bank
lending In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the debt ( ...
where the
debt Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
is not issued or traded on the public markets. "Private credit" can also be referred to as " direct lending" or " private lending". It is a subset of "alternative credit". Estimations of the global private credit industry's size vary; as of April 2024, the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
claims it is just over $2 trillion, while
JPMorgan JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational finance corporation headquartered in New York City and incorporated in Delaware. It is the largest bank in the United States, and the world's largest bank by mar ...
claims it to be $3.14 trillion. The private credit market has shifted away from banks in recent decades. In 1994, U.S. bank underwriting covered over 70 percent of middle market loans. By 2020, U.S. banks issued/held around 10 percent of middle market loans. The direct lending market expanded rapidly after the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, when the SEC tightened restrictions and capital requirements on public banks. As banks decreased their lending activity, nonbank lenders took their place to address the continued demand for debt financing from corporate borrowers. Private credit has been one of the fastest-growing asset classes. By 2017, private debt fundraising exceeded $100B. One factor for the rapid growth has been
investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...
demand In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...
. As of 2018, returns were averaging 8.1% IRR across all private credit strategies with some strategies yielding as high as 14% IRR. At the same time, supply increased as companies turned to non-bank lenders after the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
due to stricter lending requirements. Private credit investment rose in emerging and developing markets by 89% to US$10.8 billion in 2022. One recent trend has been the rise of covenant-lite loans (which is also an issue for publicly traded investment grade and high yield debt). This has been driven by investor demand for the relatively high yield compared to alternatives and a willingness to accept less protections. This has resulted in fewer company restrictions and fewer investors' rights if the company struggles. That being said, for the investment firms, covenant-lite loans can also be helpful because of the negative optics if a
portfolio company A portfolio company (commonly abbreviated as PortCo) is a company or entity in which a venture capital firm, a startup studio, or a holding company invests. All companies currently backed by a private equity firm can be spoken of as the firm's port ...
goes into default, and fewer restrictions means fewer ways a company can go into default.


Role of BDCs

In addition to private funds, much of the capital for private debt comes from business development companies (BDCs). BDCs were created by
Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of ...
in 1980 as closed-end funds regulated under the
Investment Company Act of 1940 The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress which regulates investment funds. It was passed as a United States Act of Congress, Public Law () on August 22, 1940, and is codified at . Along with th ...
to provide small and growing companies access to capital and to enable private equity funds to access public capital markets. Under the legislation, a BDC must invest at least 70% of its assets in nonpublic US companies with market value less than $250M. Moreover, like
REIT A real estate investment trust (REIT, pronounced "reet") is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hos ...
s, as long as 90% or more of the BDC's income was distributed to investors, the BDC would not be taxed at the corporate level. While BDCs are allowed to invest anywhere in the capital structure, the vast majority of the investment has been debt because BDCs typically lever their equity with debt (up to 2X their equity), and fixed income investing supports their debt obligations. With regards to size of the market, as of June 2021, BDC assets totaled $156 billion from 79 funds.


Public equity investing in private credit

Over 70% of the investor capital for private credit comes from institutional investors. For non-institutional investors looking to invest in private capital, few options exist because most of the investment vehicles are private and limited to qualified investors ($5M or more liquid net worth). As of June 2021, 57% of the BDC market was publicly traded BDCs where retail investors can invest.


Concerns

In a letter, Senators
Sherrod Brown Sherrod Campbell Brown ( ; born November 9, 1952) is an American politician who served from 2007 to 2025 as a United States senator from Ohio. A member of the Democratic Party, he was the U.S. representative for from 1993 to 2007 and the 47t ...
and Jack Reed raised concerns over a lack of oversight and transparency in the industry.


See also

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Shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2 ...


References

{{reflist Banking Credit