Private credit has grown rapidly in recent years not least due to the increased caution of traditional lenders following the global financial crisis of 2008. As part of its Decoded series, abrdn explains the asset class and its uses in the modern financial system. 

What is private credit?

Also known as private debt or private lending, private credit refers to non-bank lenders providing loans to companies. As with traditional bank lending, credit providers advance funding in return for interest payments alongside repayment of the principal after a pre-agreed term. 

Private credit is not listed on an exchange, unlike bonds, but does offer a yield to investors, which varies depending on the term of the loan and risk incurred. Private credit terms are often more tailored to the specific needs of both the borrower and the lender than the terms offered by banks.

An established and diverse asset class, private credit involves advancing capital to companies across the capital structure and spanning an array of strategies. These strategies include lending directly to established companies, funding real estate or infrastructure projects, subscription financing, distressed debt, or speciality financing, such as aircraft leasing or music royalty financing. 

All of these strategies come with their own unique level of risk and return. Senior secured financing typically offers the lowest risk with its first lien position and security interest, often over real assets, while mezzanine financing or lending to smaller, less-established companies is typically higher risk and therefore higher returning. 

Growth of private credit 

Although an established asset class prior to the global financial crisis, private credit has grown rapidly since the crisis as a result of bank retrenchment following tighter regulation. According to Preqin private credit has grown worldwide in size from c.$41bn USD In 2000 to $1.7trn at the end of 2023. 

Benefits of private credit as an investment

Private credit can offer investors in the asset class many benefits including increased access to bespoke loan structures which can be tailored to suit the investor’s requirements such as loan duration, fixed, variable or inflation linked cashflows as well as increased diversification. 

Private credit can also offer enhanced protection through covenants which are generally more restrictive than public debt instruments and direct security over underlying assets. Private credit typically gives the lender more control and private credit has therefore historically maintained loss ratios that are lower than high yield fixed income instruments – although as with any form of investing, the value, and the income is not guaranteed and can go down as well as up.

Perhaps the primary driver of investor interest however is enhanced yield. Private credit, although illiquid, typically offers an enhanced return over equivalent rated public corporate comparables ranging from 0-250bps. 

“While the private credit market has increased in profile as it has grown, we believe that conservative underwriting and market discipline remain the key factors to successful private credit investing.”

Neil Odom-Haslett, Head of Private Credit