Private credit is lending to companies by non-bank investment funds rather than banks, typically structured as privately negotiated loans that are held to maturity instead of traded on a public market.
In plain terms
After the 2008 financial crisis, bank regulators made it more expensive for banks to hold the kind of risky, floating-rate loans that mid-sized companies and private-equity-backed businesses need. Non-bank lenders — funds raised specifically to make these loans — stepped into that gap. A private credit fund raises capital from institutions and wealthy individuals, lends it directly to a borrower at a negotiated rate, and holds that loan on its books until it’s repaid, rather than selling pieces of it to other investors the way a syndicated bank loan is traded.
How it works
Most private credit is direct lending: a fund negotiates a loan one-on-one with a borrower — often a company owned by a private equity sponsor — setting the rate, covenants, and term without a bank intermediary or a public rating. Because the loan isn’t syndicated or publicly traded, pricing and terms stay private between the lender and borrower, and the fund earns a floating interest rate (commonly priced off SOFR) plus fees, largely insulated from the day-to-day price swings of public bond markets.
The dominant retail-accessible wrapper for this activity in the United States is the business development company (BDC), a type of closed-end fund created by Congress specifically to channel capital into private and smaller companies. The SEC requires a BDC to invest at least 70% of its assets in qualifying private or thinly traded U.S. companies, and BDC shares can be publicly traded, non-traded, or structured as an interval fund, which determines how easily an investor can get money back out.
The numbers
- Global private credit AUM: an estimated $1.5 trillion to $2 trillion as of end-2024, with the United States accounting for roughly $1 trillion of it, per the Financial Stability Board’s May 2026 report.
- Typical borrower leverage: 5 to 6 times debt-to-EBITDA, per the same FSB report, concentrated around single-B credit quality — higher leverage than the broadly syndicated loan market.
- BDC leverage cap: a BDC may carry debt up to a 150% asset coverage ratio (roughly 2:1 debt-to-equity), raised from the previous 200% requirement by the Small Business Credit Availability Act of 2018, provided shareholders or the board approve the change.
- Valuation frequency: private credit holdings are typically marked quarterly rather than priced continuously, which the FSB’s report flags as a source of valuation uncertainty during periods of market stress.
What people get wrong
That private credit is a niche corner of the bond market rather than a structural substitute for bank lending. It has grown to the point that regulators now study it the way they study the banking system itself — the Financial Stability Board’s 2026 report raises exactly that comparison, flagging that banks’ own exposure to private credit funds is harder to measure than direct bank lending and that leverage can stack at the portfolio-company, fund, and investor level simultaneously. The other misconception cuts toward yield: a private credit fund’s higher stated return compensates for both illiquidity and a borrower pool skewed toward companies levered too highly or rated too low for a bank or the public bond market to take on — it is not simply bank-loan economics with a markup.
Related
Read more: Alternative Assets: Investing Beyond Stocks and Bonds · Hedge Funds and Private Equity: The Other Engine of Modern Finance Wealth
See also: Dry powder · Capital call · Accredited investor