I wish I knew what private credit was, but I’m too embarrassed to ask

Private credit (also known as private debt) refers to loans that do not come through traditional bank lending or bonds that are traded on public markets. Under the narrowest definitions, it means only direct lending, in which an investor or small group of investors makes a loan directly to a company. However, broader definitions include leveraged loans – ie, loans that are arranged by banks but quickly syndicated (sold on) to a large pool of institutional investors.

There are differences between direct lending and leveraged loans in terms of the risks, the type of covenants that a loan typically carries and the position that the investor will be in if anything goes wrong (a direct-lending investor is likely to have more influence than one of the many buyers of part of a syndicated leverage loan). But there are also some similarities.

First, the borrower will often have relatively high levels of debt or be burning large amounts of cash in an effort to grow quickly – in other words, they are higher risk. Second, both types of loans usually have a floating interest rate. This means that the interest rate on the debt changes in line with benchmarks such as the secured overnight financing rate (SOFR), or the sterling overnight index average (Sonia). This differs from high-yield bonds – the main alternative for larger highrisk borrowers – which are publicly traded and mostly pay fixed interest rates. As a result, private credit may be more attractive to investors than bonds when central banks are expected to raise rate, as the interest on existing debt will increase.

Private credit is closely linked to private equity. Many key players are active in both fields and funds run by one private-equity firm will often do deals using debt provided by debt funds run by another firm. This, together with regulations that have curbed banks’ willingness to lend, has made private credit one of the fastest-growing asset classes in recent years.