WHAT IS PRIVATE CREDIT?
Private Credit Investing Basics
Credit is a contract (often, a loan) that a borrower repays a lender with interest. Private credit refers to privately negotiated loans between a borrower and a non-bank lender.
A History of Private Credit
Private Credit is a fast-growing asset class and there are several forces behind its rise.
- Bank Retrenchment
- Rise in Private Credit
The retrenchment of US and European banks creates opportunities for private lenders as borrowers seek partners who can provide flexibility, speed of execution, and surety of capital.
Decline in the Number of Commercial Bank Lenders
When capital from financial institutions became harder to obtain, private lenders stepped in to fill the void.
Growth in Global Private Credit Assets under Management
Comparing Private Credit to Traditional Fixed Income
Private credit may offer the potential for higher yield and increased investor protections through negotiated terms, covenants and pricing.
Traditional Fixed Income | Private Credit | |
| MARKET DESCRIPTION | Publicly Syndicated and Sold | Privately Originated and Held |
| TRADED | Yes | No |
| COUPON PAYMENTS | Yes | Yes |
| COUPON STRUCTURE | Typically Fixed Rate | Typically Floating Rate |
| CREDIT RATING | Rated | Not Rated |
| CALL PROTECTION | Varies | Yes |
| LIQUIDITY | Liquid | Illiquid |
| VALUATIONS | Frequent | Infrequent |
For illustrative purposes only.
ATTRIBUTES OF PRIVATE CREDIT INVESTMENTS
Private Credit Investments Typically Seek to Deliver...
- Income
- Total Return
- Lower Volatility
Private credit has offered higher yields than many traditional fixed income assets.
Yield to Maturity
The asset class has historically delivered a strong absolute return profile across various market environments.
Historical Annualized Returns (2005-2022)
The return pattern of private credit has historically been smoother than equities.
Historical Returns vs. Equities (2005-2022)
CONSIDERATIONS FOR PRIVATE CREDIT INVESTING
Here are some common types of private credit investment strategies:
Illustrative Risk/Return Profiles by Fund Type
While each has a unique risk and return profile, there are some broad risk/return generalizations for each of the private credit asset classes based on historical data.
There are several factors that drive the risk/return profile of private credit investments:
- Creditworthiness of the Borrower
- Seniority
- Interest Earned
It’s important to consider both a borrower’s current financial health and their prospects for repayment in the future.
Capital stack seniority determines the order in which investors are repaid if a business/ borrower runs into trouble. Senior debt must typically be repaid first and has the lowest risk and return potential. Equity owners sit below all debtholders and typically receive higher returns for taking on a higher amount of risk.
Illustrative Capital Stack
Private credit loans are typically floating (or variable) rate versus fixed rate. When loans are floating rate, the interest owed by the borrower will float higher (or lower) as short-term rates rise (or fall). As interest rates rise, so does the interest payment due to the lender. Of course, the inverse is true when interest rates decline.
Fixed vs. Floating Rate Interest Rate Risk
Explore Other Private Market Asset Classes
Dig deeper into three other private market asset classes to learn what they are, why they matter, and how they may fit within existing portfolios.