What is Private Credit?
Short answer: Private credit is lending originated or held mainly by non-bank investment funds and other private capital providers through negotiated, non-public instruments. It is a market channel rather than one standard product. The term can cover senior direct loans, unitranche facilities, mezzanine debt, asset-backed loans and stressed or special-situation financing, each with different priority and risk.
Borrowers may use private credit for acquisitions, growth, refinancing or situations requiring tailored terms. A lender can combine first-lien and junior risk in one unitranche facility or coordinate several tranches through intercreditor arrangements. Economics may include a floating benchmark, margin, floor, original issue discount, arrangement fees, prepayment protection and payment-in-kind interest. Flexibility can come through delayed draws, acquisition baskets or customised covenants. It can also come with concentrated lender control, detailed reporting and consent rights. Comparing only the coupon misses much of the package.
How it works
Prepare a term-by-term comparison with bank debt, bonds, equity and other available sources. Calculate cash interest, capitalised interest, all fees, mandatory amortisation and exit costs across the expected holding period. Model leverage and covenant compliance under base and downside scenarios. Map collateral, guarantees, ranking and lender voting. For unitranche structures, understand the borrower-facing agreement and any agreement among lenders that allocates economics and control behind it. Test refinancing at maturity and a no-refinancing case. Confirm that acquisition and distribution capacity fits the business plan.
Illustrative total cash financing cost = cash interest + upfront and recurring fees + prepayment or exit payments
Example
A borrower compares a 20,000 bank loan at 7% cash interest with 5% annual amortisation against a 20,000 private loan at 9%, 1% upfront fee and no amortisation for three years. Over one year, before benchmark changes, the bank requires 1,400 interest plus 1,000 principal, for total cash debt service of 2,400. The private loan requires 1,800 interest plus a 200 upfront fee but no scheduled principal, for total first-year cash use of 2,000. The private option therefore preserves 400 more cash in year one, yet its interest and fee cost is 600 higher before considering principal timing. The right choice depends on liquidity, flexibility, maturity and downside, not one rate.
Why it matters
Private credit can provide execution certainty and bespoke structures where banks have mandate, leverage or collateral limits. It is important in acquisition financing because speed, conditionality and permitted follow-on acquisitions can affect whether a transaction closes. Boards should weigh that certainty against total cost, covenant control, concentration and refinancing exposure. Investors use the debt schedule to determine the required equity contribution and distribution capacity. A tailored package is valuable only if its covenants and cash requirements remain compatible with the operating plan under reasonable downside cases.
Private credit is not inherently senior, secured or flexible. The documents determine ranking, collateral, covenants, transfer rights and remedies. Fund investors and lenders may face different regulatory regimes, and borrower obligations vary by jurisdiction. Tax deductibility, withholding, transfer pricing, financial assistance and security perfection require advice. Fees and payment-in-kind interest affect accounting effective interest and carrying values. Confidential marks are not observable market prices. Borrowers should verify the lender's committed funds and conditions, and should not assume refinancing will be available at maturity on comparable terms.