Let's look at some of the typical characteristics that define private credit transactions. These features help explain both the appeal and the risk profile of this asset class.
First, most private credit loans have floating interest rates.
They're usually tied to benchmarks like SOFR in the US, SONIA in the UK, or ESTA in Europe. This means returns adjust as interest rates move, which can be attractive in rising rate environments, but clearly provides lower returns as interest rates fall.
Loan sizes vary widely, but a common range is between $10 and $250 million. For larger companies or multi-lender deals, the size can be significantly higher. Private lenders bring flexibility by structuring loans that fit the borrower's exact situation.
Because borrowers are often non-investment grade, private credit typically commands higher spreads, sometimes 100 to 200 basis points above comparable maturity public debt. These higher returns compensate lenders for taking on more credit risk and for providing capital in a less liquid format.
Deals tend to be completed quickly because they don't require public ratings or broad syndication.
This speed is appealing to borrowers who need certainty and fast execution.
But with that speed comes the need for strong protections.
That's why private credit loans are usually covenant heavy.
Lenders typically want oversight control and early warning mechanisms built into the documentation since there are limited early exit opportunities.
However, there is a risk that private credit lenders may, in the face of high levels of competition and wanting to put their investors' money to work, enter into deals with lower levels of covenant protection.
This may only become apparent to investors as investments start to go wrong.
Overall, however, these characteristics can create a balance of risk and reward that many investors find compelling.
