Private credit is private lending to companies by non-bank investors. It is one of the fastest growing areas of the global capital markets.

The “private” part of this means that the transactions are not publicly offered to investors and not listed on a stock exchange.

It is easiest to understand by considering the analogy to private equity deals – which are investments in companies by one or a small number of private investors. These investments are not publicly offered and are not listed.

Different to bank loans, syndicated loans and bonds

Private debt deals are different to traditional corporate loans – in that the lender (investor) is not a bank in that market. So for example a $50m loan from a local bank to a real estate company would not be a private credit deal – but the same loan from a pension fund would be a private credit deal.

Private debt deals are different from syndicated loan deals in that they are not documented in the same way as syndicated loan deals and not bought by syndicated loan desks at banks.

Private debt deals are different from public bonds in that they are not listed on a public stock exchange and are not publicly offered to a wide range of investors.

Private credit transaction sizes

Public credit transactions have typically historically ranged from around $30m to $300m. This has changed in recent years – as capital enters the market and now we see firms doing much smaller deals (to wrap up into a portfolio) and larger deals of up to $5bn.

Formats

Private credit deals are structured in a number of formats. These include:

• Loans
• Notes
• Bonds
• Facilities

Categories of Private Credit

The types of private credit are:

• Direct Lending, Investment Grade – private credit investors lend to investment grade (BBB- or higher rated) companies.
• Direct Lending, High Yield – private credit investors lend to sub-investment grade (BB+ or lower rated) companies.
• Mezzanine Debt/Junior Debt – lending to companies where you are only repaid after other senior lenders are repaid. This means that you receive a higher interest rate than senior lenders – but your losses if things go wrong can be higher.
• Asset Backed Private Finance – lending to companies where the loan is secured by assets – for example aircraft that the company owns.
• Distressed Debt – lending to companies that are unable to pay back their current debts.
• Special Situations – lending to companies that want to use the money for mergers/acquisitions or other special situations.

Market Size

The private credit market is growing fast. It is estimated to be around $1.5tn. That is up from $1tn four years ago. In four more years, it is estimated to be around $3tn.

The Largest Investors

The most active investors in private credit markets include Apollo Global Management, Ares Management, Oaktree Capital Management, Blackstone, Goldman Sachs Asset Management, Carlyle Group, Kohlberg Kravis Roberts (KKR), and Brookfield Asset Management.

The Future

The private credit markets have grown rapidly. The amount of capital in the private credit markets has grown rapidly, as has the number of asset managers. With this we are seeing greater competition for traditional private credit deals and the expansion of private credit into new asset classes – especially in asset-backed finance, investment grade lending and project finance.

We are also seeing private credit firms look to build their own origination capabilities – where, for example, they can lend directly to many smaller borrowers and then build up asset pools in that way rather than having to compete for already originated asset pools from third party originators. We expect this vertical integration to continue and it could become a major differentiating factor for private credit asset managers pitching for capital from their investors.

Connected with this is a race for scale – where the top private credit managers are raising larger and larger funds – with the view that this will let them invest in deals that are too large for competitors, and it will allow them to build origination and operational capabilities that would not be economical for smaller competitors. With higher interest rates and the risk of an upcoming recession, some existing private credit assets will default and there will be new opportunities for investors running distressed opportunity strategies. These might also limit private credit supply – and force greater competition and potentially ultimately consolidation in the sector.

The market (measured by deployed capital) is expected to continue to grow rapidly for the coming 5 years. Competition is expected to increase – which is leading to a race to scale as quickly as possible among managers, and is also creating a race to build capabilities to expand the types of credit that private credit managers extend. Looking at private credit as a competitor to the banking sector, there is a lot of room for growth.