So what exactly do we mean when we say private credit? At its core, private credit refers to lending that takes place outside of the traditional banking system.
Instead of banks providing loans, you have private funds and institutional investors stepping in in their place.
The companies that typically borrow from private credit lenders are what we'd call middle-market businesses, firms with earnings in a range that's too large for small business loans, but too small to issue public bonds efficiently. Many of these companies generate somewhere between $25 and $75 million in EBITDA, putting them squarely in the middle market category.
Private credit lenders don't operate like banks.
They don't take deposits, and as a result, they don't use deposit insurance or central bank lending facilities.
Instead, they raise capital from investors such as pension funds, insurance companies, family offices, and high-net-worth individuals, and deploy that capital in the form of loans. Private equity funds and hedge funds can also act as lenders in this space. So why do companies borrow from private credit providers? Often, it's because they want a funding solution that's more flexible, faster to arrange, or tailored to their specific needs.
Banks, especially after the 2008 global financial crisis, have become more constrained in the type of lending they can or even want to do. Private credit fills that gap.
So in simple terms, private credit is about private lenders providing financing directly to companies that need capital efficiently, quickly, and often with more customization than banks can offer.
