Private Credit
Loans made outside the banking system, usually at floating rates.
Why private credit can pay more
Private credit moves lending outside traditional public bond markets and bank lending channels. Borrowers may pay higher rates because the loan is customized, financing is harder to obtain elsewhere, the lender accepts less liquidity or the underlying credit risk is greater.
The extra yield is therefore not free income. It is compensation for some combination of credit risk, complexity and illiquidity.
Loan seniority, collateral, covenants and the borrower's ability to service debt matter more than the headline interest rate.
Liquidity deserves separate analysis
A private-credit portfolio may hold loans that do not trade regularly. Even when a fund offers periodic withdrawals, the assets underneath it may still be difficult to sell quickly.
Investors should distinguish the contractual maturity of the loans from the liquidity offered by the fund or platform. Redemption limits, gates, notice periods and delayed distributions can matter most precisely when many investors want cash at the same time.
Common mistakes
- ×Treating the spread over base rates as a premium without added risk
- ×Ignoring seniority in the capital stack and covenant strength
- ×Assuming recent low default rates describe a full credit cycle
- ×Committing capital that may be needed before loans mature