How the loan works
The structure is straightforward. A borrower needs funding for a purpose a bank either will not fund or will not fund on workable terms: a construction project, an acquisition, working capital, or a refinance on a tight timeline. A private credit manager assesses the borrower, sets terms, and lends directly, usually secured against an asset or a set of cash flows. Investors in the fund are, in effect, the lender.
The gap banks leave
The appeal is largely about the gap banks leave. Banks operate under capital and regulatory settings that make certain loans unattractive or slow to approve, even where the underlying credit is sound. Private lenders can price and structure around that gap, which is generally reflected in the return investors are offered relative to more conventional fixed income.
Where the risk sits
The risk sits in the same place as the appeal. Because private credit loans are not traded on an exchange, an investor cannot simply sell out on a bad day the way they might sell a listed bond. Valuation and liquidity depend on the manager's processes, not a public market price. This makes manager quality, not just the loan terms, central to the outcome: how a manager underwrites, monitors and works out a loan that goes wrong matters as much as the rate on the loan that goes right.
Where it fits
Private credit is not a substitute for cash, and it carries a risk of loss. It is one tool among several for investors seeking income exposure that behaves differently to listed shares and bonds, used alongside, not instead of, other asset classes.
This article is general information only. It does not take into account any person's objectives, financial situation or needs, and is not personal financial product advice.
