October 2, 2026 · 8 min read
What Is Private Credit? Definition, How It Works and Examples
Loans that investment funds make to companies, the way banks do: how they work, where the interest comes from, how investors get in and what can go wrong.
- Private credit
- Alternatives
- Funds
What is private credit? It is lending to companies by lenders that are not banks, mostly investment funds. The lender negotiates the terms directly with the borrower. Unlike bonds or syndicated bank loans, these loans do not trade. They usually carry a floating rate, which moves with market interest rates. The lender holds them until they are repaid. Covenants, conditions written into the loan, let the lender act early if the borrower weakens.
If you invest in private companies, private credit is the other half of the same companies’ balance sheets. Shareholders own the upside. Lenders are paid first and earn a contracted rate. The cost of being first in line is that you cannot easily sell a private loan, because it has no exchange. Its valuation also moves slowly until a borrower fails.
$2.1T
Private credit worldwide, counting loans made and money committed but not yet lent
$1.6T
Run by private credit managers based in the United States
5–25%
Share of its stock an interval fund must offer to buy back at each set date
70%
Minimum share of a BDC’s assets that must be qualifying investments, mainly in US private companies
What Is Private Credit in Finance, and How Does It Work?
The typical borrower is a middle-market company, meaning a mid-sized business. It is too small or carries too much debt for the bond market, and banks have become less willing to lend to it. Many such companies are owned by a private equity sponsor, a firm that buys companies with its investors’ money. The sponsor is often buying or refinancing the business. A private credit fund lends to the company directly, often alone or as one of a small group of lenders. It keeps the loan on its own books.
- Price
- Floating rate: a base rate that resets with the market, plus a fixed margin called the spread. So the interest payment, or coupon, rises and falls with short-term interest rates. The lender often also charges an upfront fee when the loan closes.
- Security
- Senior loans are secured on the borrower’s assets and are repaid first. Junior loans are repaid after them and charge more.
- Covenants
- Maintenance covenants are tests the borrower must pass every quarter, such as a cap on its debt relative to its earnings. They let the lender renegotiate before a default happens.
- Holding period
- Loans are usually held until they mature or are refinanced. There is no secondary market to sell into on a bad day.
What Is Private Credit in Simple Terms?
A fund collects money from investors and lends it to companies, the way a bank would. But it takes no deposits and is not regulated as a bank. Borrowers pay for speed, certainty and terms built around their needs. Investors are paid for lending money they cannot easily get back before the loan ends.
What Is Direct Lending in Private Credit, and What Are the Other Strategies?
Direct lending is the core of the market. It means senior, secured, floating-rate loans to mid-sized companies owned by private equity sponsors. Sometimes the fund makes one “unitranche” loan that replaces the separate senior and junior layers. The other strategies range from lower to higher risk.
- Direct lending
- Senior secured loans to established companies. This is the lower-risk end of private credit.
- Mezzanine
- Junior debt that ranks between senior loans and equity. It often comes with warrants, the right to buy shares later, or with a payment-in-kind coupon, where interest is added to the loan in place of cash. It earns more and recovers less in a default.
- Distressed
- Buying the debt of companies in or near default, or lending to them, to profit from a restructuring. Returns depend on how the workout, the negotiated rescue of the loan, turns out. The coupon matters less.
- Specialty finance
- Lending secured on specific assets or cash flows, such as receivables, equipment, royalties or loan portfolios. The loan is secured by those assets, and the rest of the company is not pledged.
- Venture debt
- Loans to venture-backed companies between equity rounds, usually with warrants. Repayment often depends on the next round closing. See dilution for what the warrants cost shareholders.
A Worked Example: Where the Yield on a Direct Loan Comes From
A fund makes a five-year, $50M senior secured loan to a software company owned by a private equity sponsor. The rate is a floating base plus a 5.5% spread, with a 2% upfront fee. The table shows one year of the loan. It then shows the same loan if the borrower defaults.
Illustrative figures for an invented loan. The contract caps the coupon but puts no cap on the loss. Two years of interest, $9.5M in all, covers 54% of the $17.5M loss on principal. So lenders price in how likely a default is and how much they would recover
Illustrative structure · rates and recovery assumed for the example · as of October 2026
The floating rate cuts both ways. When the base rate rises, the lender earns more. The borrower, already carrying heavy debt, pays more out of the same cash flow. The IMF flagged this in 2024. It named floating-rate debt to small, heavily indebted borrowers as the first of the sector’s vulnerabilities in a downturn.
What Is Private Credit Investing? Funds, BDCs and Interval Funds
Investors rarely lend directly. They buy into a vehicle that does, and the vehicle decides how often money can come back.
- Private credit fund
- A closed-end limited partnership: a fund with a fixed life that you cannot leave early. You commit an amount, and the manager draws it through capital calls as loans are made. It returns the money as the loans are repaid, over a fund life of several years. Usually limited to accredited or higher-tier investors.
- Business development company (BDC)
- A closed-end fund regulated under the Investment Company Act that lends mainly to US private companies. At least 70% of its assets must be qualifying investments. An asset-coverage test caps its borrowing. Some BDCs are listed and trade daily. Non-traded BDCs offer limited buybacks.
- Interval fund
- A registered closed-end fund that, as a fundamental policy, offers to buy back between 5% and 25% of its shares every three, six or twelve months. If holders ask to sell more than the fund offers to buy, each gets a pro rata, or proportional, share.
- Tender-offer fund
- A closed-end fund whose board decides, offer by offer, whether to buy back shares through a tender offer. The board chooses when, and no schedule is set.
What Is an Interval Fund in Private Credit?
It is a semi-liquid wrapper: you can sell only part of your holding, and only at set times. Private loans sit inside, and a scheduled buyback window sits outside. The window is limited by design. If many holders ask to leave at once, each sells a pro rata share of the buyback amount and keeps the rest. The IMF describes this run risk as rising with the growth of funds aimed at individual investors.
The rules fix how much can be bought back and how much a BDC can borrow. They say nothing about what the loans are worth or whether they are repaid
As of October 2026 · 17 CFR 270.23c-3; 15 USC 80a-54, 80a-60 · checked 10.01.2026
What Is the Private Credit Market, and What Can Go Wrong?
The IMF put private credit at about $2.1 trillion worldwide in 2023. That counts loans made and money committed but not yet lent, mostly in North America and Europe. Managers based in the United States alone ran $1.6 trillion by June 2023. The IMF’s April 2024 report named four vulnerabilities. Borrowers are small, carry heavy debt and pay floating rates. Semi-liquid funds that promise regular exits from illiquid loans are growing. Borrowing is stacked at three levels: the company, the fund and the investor. And valuations are infrequent and partly subjective, in a sector that has not been through a severe downturn at its current size.
Common Mistakes
- Reading the coupon as the returnThe return is the coupon minus defaults, net of fees. A high headline yield usually means a riskier borrower.
- Treating semi-liquid as liquidAn interval fund or non-traded BDC buys back a limited share at set times. When many investors want out, each gets only part of what they asked for.
- Trusting a smooth NAVA fund’s NAV, or net asset value, is what its holdings are reported to be worth. Models and managers value the loans, and no market prices them. Calm reported prices can simply mean the loans are priced rarely.
- Ignoring the layers of borrowingA fund that borrows, lending to companies that borrow heavily, magnifies losses at both levels.
- Confusing it with equityCredit caps your gain at the contracted rate. Equity in the same company, the subject of pre-IPO investing, carries the upside and is paid last.
What Does a Private Credit Job Involve?
Inside a manager, the work divides into four roles. Origination means finding borrowers and sponsors. Underwriting means analyzing the business and negotiating terms and covenants. Portfolio management means checking covenant tests and borrower results each quarter. Workout means restructuring loans that go wrong. These are a lender’s skills.
Private credit pays a contracted rate for money you cannot get back early. The risk sits in the borrower, the layers of debt and the exit terms of the vehicle you hold it through.
The Terms This Page Uses
- Direct lending
- Senior, secured, floating-rate loans made by a fund straight to a company, usually sponsor-backed and mid-sized.
- Floating rate
- An interest rate made of a base rate that resets with the market plus a fixed spread.
- Unitranche
- A single loan that combines the senior and junior debt layers at one blended rate.
- Maintenance covenant
- A financial test the borrower must pass every period, such as a cap on its debt. If the borrower fails it, the lender can step in.
- Business development company (BDC)
- A regulated closed-end fund that lends mainly to US private companies, under a 70% qualifying-asset rule and a borrowing cap.
- Interval fund
- A registered closed-end fund that offers to buy back 5%–25% of its shares at fixed intervals of three, six or twelve months.
- Capital call
- A manager’s request for committed money as the fund makes loans or investments.
- Limited partner
- An investor in a fund with no role in its management and liability limited to the commitment.
Questions About Private Credit
Funds raise money from investors and lend it directly to companies, mostly mid-sized and often owned by private equity. The loans pay a floating rate, are secured on the borrower’s assets and carry covenants. The fund holds them to maturity and passes interest and repayments back to its investors.
A vehicle, usually a closed-end limited partnership, that pools investors’ commitments and makes private loans. Money is drawn as loans are made and returned as they are repaid, over a fund life of several years.
Credit lends to a company and is repaid first at a contracted rate. Equity owns the company and keeps whatever is left. The two often meet in the same deal, when a private equity buyer borrows from a private credit fund to pay for the purchase.
Yes, through listed BDCs, which trade like shares. They can also use interval funds and non-traded BDCs, which buy back shares on a schedule or when the board decides. Private credit funds themselves are usually limited to accredited investors or higher-tier buyers.
It depends on what you compare. Credit ranks ahead of equity in the same company, so losses reach it later. It still carries real risk. Borrowers default, recoveries are uncertain and prices are hard to see. The vehicle may also limit when you can withdraw.
Where Every Rule and Figure on This Page Comes From
Every rule and figure was checked against the primary source on October 1, 2026. The market-size figures are the IMF’s estimates for 2023. For the equity side of the same companies, see what pre-IPO investing is.
- 01International Monetary Fund04.2024GFSR ch. 2, The Rise and Risks of Private Credit — $2.1T in 2023, $1.6T US managers, vulnerabilities
- 02International Monetary Fund04.2024GFSR ch. 2 summary — floating rate, leveraged borrowers, semi-liquid funds, valuations
- 03Code of Federal Regulations (Cornell LII)Current rule17 CFR 270.23c-3 — interval fund repurchase intervals and amounts
- 04US Code (Cornell LII)Current law15 USC 80a-54 — BDC 70% qualifying-assets requirement
- 05US Code (Cornell LII)Current law15 USC 80a-60 — BDC asset coverage of 200%, or 150% under conditions
This page explains how a market works. It is not investment advice, not a recommendation of any security, strategy or company, and not an offer to sell or a solicitation to buy anything. Private companies may never list or be acquired, positions in them can be illiquid for years, and the entire amount invested can be lost. Figures are accurate as of the dates shown and change. Requirements for investor status, and the tax treatment of a private holding, differ by jurisdiction — the jurisdiction is named wherever this page discusses either. Prepared by the AXEVIL Capital research team.
What closed on the private market in the past two weeks
The rounds that priced, the tender offers that opened and the listings that filed — with the structure of each deal and the date on every figure. Written by the team that reads the paperwork.
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