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February 23, 2023 - Private credit has become an institutionalized and deeply capitalized asset class over the past ten years. But what exactly IS private credit? In this series, HighGround Director of Private Markets Philip Godfrey shares his expertise about the asset class, beginning with definitions.

Private credit is simply defined as privately negotiated loans and debt financing provided for companies by non-bank lenders. This debt consists of illiquid loans that are not traded in the public markets, hence the term “private,” and the loans are typically held by private credit funds managed by institutional investment management firms.  

Private credit loans are structured between established, post-venture stage companies and private credit funds that derive their capital base from institutional investors such as endowments and pension funds. The company is the borrower, and the private credit fund is the lender. The loan is either a sponsored transaction, arranged through the company’s financial sponsor (like a private equity firm) or the loan is a non-sponsored transaction, directly originated with company management. In either case, the private credit fund is replacing the financing role that was traditionally the business of commercial banks and financial institutions. 

The credit underlying private debt can be either corporate-based, with repayment coming from cash flows generated by an operating company, or asset-based, with repayment coming from cash flows generated by a physical or financial asset. Investments in private credit are accessed through private fund vehicles that are actively managed and can be diversified across strategies, industry sectors, geographies and time periods.

The asset base of the private credit market has grown exponentially in the past decade, allowing for increased scale and capital flexibility and presenting companies with an array of customized financing solutions. From a borrower’s perspective, privately-arranged debt offers significant advantages over credit provided by traditional financial institutions through customization, timeliness and scale. For lenders, the rise in corporate buyout transactions and the inevitable need to fund corporate growth provide a ready source of lending opportunities, no matter the market environment. Investors are attracted to private credit by its capital preservation characteristics and the potential for higher yields than mainstream fixed income alternatives. It appears that there can be something for everyone in private credit, but to understand its wide acceptance in the market, it is important to recount how we got here.

In our next installment, Philip will do just that, by providing a brief history of private credit as an asset class.

Other posts in this series:
Private Credit: The Evolution of an Asset Class
Private Credit: Key Investment Characteristics
Private Credit: Approaches to Investing