What the Hell Is Private Credit - and Why You’ve Never Heard of It Until Now

Steadfast Equity
Jun 17
17 min read

Updated: Jun 17

Private credit is a rapidly growing $1.7 trillion investment market that operates outside of traditional banks and public exchanges. It involves loans negotiated directly between borrowers and private lenders, offering higher returns but with less liquidity and transparency. Here's what you need to know:

What is it? Private credit refers to customized loans made by non-bank lenders to businesses, bypassing public markets.
Why is it growing? Regulatory changes since 2008 reduced bank lending, creating opportunities for private lenders to fill the gap.
Who uses it? Middle-market companies ($10M–$1B revenue) and institutional investors dominate this space.
Key benefits: Higher yields (4.2% premium over public credit), floating interest rates, and portfolio diversification.
Risks: Illiquidity, lower recovery rates on defaults, and limited transparency.

Private credit is becoming a key option for investors seeking higher returns and diversification while supporting businesses that struggle to secure traditional funding. But it requires careful due diligence and long-term commitment.

How Private Credit Works

What Is Private Credit?

Private credit refers to loans negotiated directly between a borrower and a non-bank lender, standing apart from traditional bonds or loans traded on public exchanges. Unlike standardized financial instruments with clear market pricing, private credit transactions are tailored to the specific needs of both parties. This customization not only sets private credit apart but also allows for the potential of higher returns.

However, this flexibility comes with some trade-offs. Private credit investments are typically illiquid, meaning they can’t be easily sold before they mature, unlike publicly traded bonds. But this illiquidity often results in higher returns, thanks to what’s known as the illiquidity premium and complexity premium. Additionally, private loans are often backed by collateral, which can help reduce losses in the event of default. Many private loans also feature floating interest rates, which adjust with market conditions, offering a layer of protection against interest rate fluctuations that can impact fixed-rate bonds.

How Private Credit Deals Get Made

Private credit deals are created through direct negotiations between borrowers and private lenders, bypassing the layers of intermediaries typically involved in syndicated loans. This streamlined process is one of the reasons private credit appeals to many borrowers - it’s faster and more precise.

Once these loans are issued, lenders usually hold onto them until maturity or refinancing, rather than trading them in secondary markets. This "buy-and-hold" approach minimizes execution risks and fosters long-term relationships between borrowers and lenders.

Most private credit loans are senior secured and have floating rates. Being senior secured means these loans take priority in the capital structure, while floating rates adjust with interest rate changes. The average loan term is about five years, but terms are often customized to meet the borrower’s specific needs.

These loans can also include features not commonly found in traditional bank loans. For instance, they may have structured equity components, specific prepayment terms, or provisions that give lenders some oversight of the borrower’s operations. Since 2022, the average loan size has grown significantly, surpassing $80 million.

"Borrowers have been willing to pay a premium for the speed and certainty of execution, agility, and customization that private lenders offer." – Fang Cai and Sharjil Haque,

Another trend in private credit is the rise of club deals. In these arrangements, several private lenders collaborate to share the credit risk. Over time, the average number of lenders involved in each loan facility has grown, reflecting both the increasing size of deals and the desire to spread risk. This collaborative approach has helped create a specialized ecosystem of borrowers and lenders in the U.S.

Who Borrows and Who Lends in the U.S.?

The unique structure of private credit deals has shaped a distinct market ecosystem in the U.S. Borrowers are often middle-market companies with annual revenues ranging from $10 million to $1 billion. These companies turn to private credit for various reasons, such as funding general operations, refinancing existing debt, or supporting private equity transactions.

On the lending side, the market includes private credit funds, Business Development Companies (BDCs), and institutional investors. By 2024, private credit in the U.S. had grown into a $1.34 trillion asset class, with direct lending accounting for the largest share. In fact, direct lenders held 64% of the market in 2023, up from about 49% in 2022.

Banks also play a supporting role in this ecosystem. While not the primary lenders, banks have significantly increased their commitments to private credit vehicles, with lending jumping from $8 billion in 2013 to roughly $95 billion by 2024. Major U.S. banks like J.P. Morgan Chase, Citigroup, Wells Fargo, and Bank of America are key players in this space.

Some of the largest private credit borrowers include well-known names like Blackstone, Ares Capital, and FS KKR, demonstrating how even major financial firms rely on private credit.

Market Participants	Role	Key Characteristics
Middle-Market Companies	Borrowers	$10M–$1B annual revenue; seek flexible financing
Private Credit Funds	Lenders	Focus on direct lending and a buy-and-hold strategy
BDCs	Lenders	Regulated investment vehicles, often publicly traded
Banks	Credit Providers	Provide credit lines to private credit vehicles

Foreign banks are also active in this space, with institutions like BNP, SMBC, and Barclays among the largest non-U.S. lenders. Interestingly, foreign banks tend to have higher utilization rates - 67% compared to 54% for domestic banks.

Why Private Credit Is Growing But Still Unknown

Banking Changes That Created Opportunities

The rapid rise of private credit can be traced back to significant changes in banking practices after the 2008 financial crisis. When regulators stepped in to stabilize the financial system, they also unintentionally opened the door for private lenders to step in.

One of the key regulatory changes was the introduction of Basel III, which required banks to hold more cash reserves and adopt stricter lending policies. These rules reshaped how banks operated, forcing them to reduce their loan activity relative to their FDIC-insured assets - from 60% to 50% - and increase cash holdings from 5% to 15%.

This shift hit middle-market lending particularly hard. For banks, the costs of conducting detailed due diligence on loans to smaller businesses became less appealing. Even though lending to small and medium-sized enterprises posed no greater risk than lending to large corporations, banks began favoring standardized loans that were easier to manage and complied more easily with regulatory demands.

This left a massive gap in the market, which private credit funds were quick to fill. Since 2013, private credit has surged from $400 million to $1.4 trillion, with the global market projected to reach nearly $2 trillion by 2024. The momentum shows no signs of slowing - Morgan Stanley estimates assets under management in private credit will grow by 64% over the next four years, reaching $2.3 trillion by 2027. Recent events, like the collapse of Silicon Valley Bank, have only accelerated this trend as lawmakers consider imposing stricter regulations on regional banks.

"The current credit vintage, which sports lower leverage, tighter structures, and wider pricing [i.e., higher rates], is significantly more investor-friendly than anything over the last decade." – Churchill Asset Management's co-head of senior lending and head of capital markets

These shifts in banking practices have not only fueled the growth of private credit but also contributed to its relatively low profile.

Why Private Credit Stays Out of the Spotlight

Despite its impressive growth, private credit remains largely out of sight for most investors. The reasons for this are deeply tied to how the industry operates.

First, as the name suggests, private credit deals are private. Unlike stocks or bonds that anyone can trade through a brokerage account, these investments are negotiated behind closed doors. High minimum investment requirements - often in the millions - make them accessible only to large institutions like pension funds, insurance companies, or wealthy family offices.

Another factor is the lack of transparency. Public companies are required to file quarterly reports, disclose major changes, and undergo regular audits. In contrast, private credit operates in a much more opaque environment. Borrowers often prefer this discretion, as it allows them to keep financial details confidential.

Private credit transactions also rely heavily on personal networks. Deals are typically arranged through private equity sponsors or specialized intermediaries, allowing them to bypass the extensive regulatory filings that public transactions require. This streamlined approach enables faster deal-making but keeps the market out of the public eye.

Finally, the illiquidity of private credit plays a role in its low visibility. Unlike public credit, which offers daily trading and high liquidity, private credit requires investors to commit funds for several years. Interestingly, this long-term commitment, combined with its low correlation to public markets, can make private credit an attractive option for those looking to hedge against market volatility while focusing on long-term value.

Private credit may not grab headlines, but its unique characteristics and growing role in the financial ecosystem make it a compelling area to watch.

Private Credit Risks, Returns, and Ethics

Risk and Return Profile

Private credit has delivered an average yield premium of 4.2% over public credit in the past decade. But with these higher returns come added risks that investors need to understand.

Credit risk is one of the biggest concerns. Defaults can lead to steep losses, with recovery rates highlighting the disparity. Direct loans tend to recover only about 33% of their value after default, compared to 52% for syndicated loans and 39% for high-yield bonds.

Another challenge is illiquidity. Private credit locks up capital for extended periods, as there’s virtually no secondary market for these loans. This lack of liquidity can be particularly problematic for institutional investors who might face sudden capital demands during economic downturns.

On the positive side, private credit often features floating interest rates, which can act as a cushion in rising rate environments. James Reynolds, co-head of private credit at Goldman Sachs Asset Management, notes:

"see private credit as being a good hedge against potential inflation as well, given that most of what we do when we lend to a borrower is exposed to a floating rate."

However, the complexity of private credit deals adds another layer of risk. These transactions require thorough due diligence and constant monitoring. For instance, declining interest coverage ratios signal that borrowers are finding it harder to meet their debt obligations. Compounding this issue, 90% of broadly syndicated loans now lack strict financial maintenance covenants, suggesting that underwriting standards may be slipping as competition heats up.

The customized nature of private credit deals is part of what drives their higher returns, but it also amplifies the risks. Beyond these financial factors, ethical considerations are becoming a critical part of the decision-making process for investors.

Ethical and Socially Responsible Investing

Investors aren’t just looking at numbers anymore - they’re increasingly weighing the ethical impact of their investments. Private credit, with its ability to channel funds into targeted initiatives, is uniquely positioned to align financial returns with meaningful outcomes.

The appetite for ethical investing continues to grow. Global sustainable investments have surged, surpassing $30 trillion - a 20% increase since 2020. Impact investing alone reached $1.16 trillion by the end of 2021, more than doubling in just three years.

This shift isn’t just about ideals; it’s also driven by pressing global challenges. Achieving Net Zero goals by 2050 demands an estimated $300 trillion in climate transition financing, with private capital expected to cover up to 70% of this amount. Credit is projected to account for around 60% of that total.

Ethical private credit strategies are already attracting significant capital. For example, in October 2024, Nuveen raised $170 million for an impact credit fund targeting investment-grade companies with environmental and social goals. Similarly, Allianz Global Investors secured EUR560 million for its impact private credit strategy, focusing on climate change and inclusive capitalism.

Private credit managers are also experimenting with incentive structures to encourage better environmental, social, and governance (ESG) outcomes. Andrew Tan, CEO of Muzinich & Co in Asia Pacific, explains:

"What we say to borrowers is that if you're able to meet certain ESG measures and milestones going forward, we will give you a reduction in the price of the debt as an incentive to get them to move towards a better ESG outcome."

That said, private credit managers generally have less influence over portfolio companies compared to private equity, making it harder to enforce ESG standards effectively.

Private Credit Pros and Cons

Advantages	Disadvantages
Higher yields – Offers a 4.2% premium over public credit	Illiquidity – Capital is locked up for years with no secondary market
Floating rate protection – Adjusts with market rates	Lower recovery rates – Direct loans recover only 33% on default, compared to 52% for syndicated loans
Portfolio diversification – Low correlation with public markets	Complexity – Requires thorough due diligence and ongoing monitoring
Customizable structures – Tailored for specific needs	Limited transparency – Less oversight than public markets

Private credit also provides the advantage of direct lending relationships, which allow for better control over loan terms. Additionally, its floating-rate structure can help hedge against inflation.

However, these benefits come with trade-offs. The illiquidity premium means that investors must commit capital for the long haul, making it essential to approach these investments with detailed analysis and a clear understanding of the risks.

Another factor to consider is regulatory uncertainty. As private credit grows, it’s drawing more scrutiny, and new regulations could impact returns or operational flexibility. This evolving landscape underscores the need for careful portfolio management.

Private Credit Strategies and Steadfast Equity's Options

Common Private Credit Strategies

The private credit market, currently valued at around $1.6 trillion, offers a range of strategies tailored to different risk and return preferences. Here's a look at some of the most prominent approaches:

Direct lending focuses on senior debt investments, prioritizing capital preservation. It offers steady returns and typically generates 2–4% higher yields compared to syndicated leveraged loans. With high recovery rates, this strategy centers on secured loans to well-established companies.
Mezzanine debt bridges the gap between traditional debt and equity. While it carries more risk, it often includes equity components like warrants, which can enhance returns. Companies often turn to mezzanine financing for growth projects or acquisitions when traditional loans fall short.
Distressed debt targets businesses in financial trouble or bankruptcy. Although it involves higher risk, it can yield substantial returns if the company successfully recovers. Success hinges on identifying businesses with solid fundamentals despite temporary challenges.
Credit opportunities focus on stressed situations or unmet capital needs, offering both income and potential capital gains. This flexible strategy allows managers to take advantage of market disruptions and unique lending scenarios.
Specialty finance explores niches like equipment leasing, consumer finance, and royalties. It provides diversification by tapping into areas that traditional lenders often overlook [28, 29].

Private credit typically offers spreads that are 200 to 600 basis points higher than public markets, depending on credit quality. Moreover, it tends to exhibit lower volatility than publicly traded markets, making it appealing to investors seeking steady and predictable returns.

Steadfast Equity's Investment Approach

Steadfast Equity builds on these strategies with a focus on ethical investing and long-term value. The firm integrates responsible principles into every decision, aiming to create real value while positively impacting society.

"At Steadfast Equity, our investment philosophy is rooted in the principles of long-term value creation, safety, and ethical stewardship."

Steadfast Equity avoids investments that could cause harm, instead prioritizing opportunities that support the broader economy, such as private credit and asset-backed royalties.

"We believe that the choices we make as investors have a profound impact on society."

The firm also carefully selects its investor partnerships, working only with those who share its commitment to ethical practices and lawful conduct. This ensures that deployed capital aligns with both financial and societal goals.

"We're in the business of empowering builders, not enabling bad actors. That's a standard we don't apologize for - and one that our long-term partners respect."

Steadfast Equity operates on a global scale to legally optimize tax efficiency, helping investors retain more of their earnings. All offerings comply with SEC Regulation D, ensuring robust investor protections.

Steadfast Equity Bond Options Overview

Steadfast Equity offers a diverse range of bond investments tailored to meet various investor needs. Among its standout products is the DualYield™ Bond, a hybrid structure providing both monthly income and compounded growth.

DualYield™ Bonds deliver a total annual yield of 19.7%. Investors can receive up to 12% APY as monthly interest, with the remaining 7.7% compounding over time. The minimum investment for this option is $200,000, with a 5-year term.

For those with different preferences, Steadfast Equity also offers multiple bond series:

Term Length	Monthly Payment	Compounded
1 Year	10.0% APY	12.5% APY
3 Year	11.0% APY	13.5% APY
5 Year	12.0% APY	14.5% APY
8 Year	13.0% APY	15.5% APY
12 Year	14.0% APY	16.5% APY

Additionally, high-yield compounded options are available, offering 15.0% APY for 3-year terms and 18.5% APY for 5-year terms, based on availability. The minimum investment starts at $50,000, but many investors choose to begin at $200,000 or more to access perks like principal bonuses and enhanced yields. These bonds are also compatible with Self-Directed IRAs, making them a practical choice for retirement planning.

One unique feature of the DualYield™ Bond is its flexibility. Investors can adjust or rebalance their allocation with just 45 days' notice, a level of liquidity uncommon in traditional private credit investments.

Steadfast Equity's financial strength further supports investor confidence. With over $800 million in assets and less than $200 million in liabilities, the firm demonstrates its commitment to ethical, long-term investments while providing security for bondholders. These tailored options highlight the evolving role of private credit in modern fixed-income portfolios.

What is Private Credit? | Direct Lending Explained

How to Evaluate Private Credit Investments

Making sound decisions in private credit investing depends on carefully balancing financial metrics with ethical considerations. Unlike public bonds, private credit investments are more customized and less transparent, requiring a detailed look at both numbers and broader qualitative factors.

Key Metrics for U.S. Investors

When evaluating private credit opportunities, it’s important to focus on several key metrics that provide insight into risk and potential returns:

Loan-to-Value (LTV) Ratio: This metric shows the proportion of debt compared to the value of a borrower’s assets. A lower LTV ratio typically signals a safer investment.
Company or Deal Leverage: This measures how much debt a company holds relative to its earnings. High leverage can mean higher potential returns but also comes with greater risk, as the borrower may struggle to manage its debt.
Interest Coverage Ratio: This ratio reflects how easily a company can cover its interest payments using its earnings before interest and taxes (EBIT). Ratios below 2.0x can be a red flag, while those above 3.0x suggest a more stable ability to service debt. For context, leveraged loan borrowers currently average an interest coverage ratio of about 2.7x (as of 2023).
Fund-Level Leverage: This looks at how much an investment fund borrows to boost returns. While this can increase yields in strong markets, it also amplifies losses during downturns.
Yield Analysis: Private credit investments typically offer yields between 7% and 9%, which is higher than the 3% average for investment-grade bonds. However, these higher returns come with added risk.
Cash Flow Stability: Since private credit borrowers often provide less financial transparency than public companies, it’s crucial to review multi-year financial statements for consistent cash flow, steady margins, and revenue growth.
Industry Dynamics and Management Quality: Assessing the borrower’s industry trends and the leadership team’s track record can help gauge their ability to handle challenges, especially in scenarios where exit opportunities are limited.

In addition to these financial metrics, ethical factors are becoming increasingly important in evaluating private credit investments.

Ethical Investment Screening

Ethical considerations add another layer to the evaluation process, helping investors identify risks that might not be apparent through financial analysis alone.

ESG Factors: Environmental, social, and governance (ESG) metrics can reveal potential risks, such as regulatory penalties or operational challenges, stemming from poor environmental practices or weak governance.
Sustainability Risk Assessment: This involves examining how factors like climate change policies or labor disputes could affect a borrower’s long-term cash flow.
Governance Structure Evaluation: Strong governance - such as balanced board composition, fair executive compensation, and clear shareholder rights - is often linked to better financial outcomes and lower default risks.
ESG Scoring Models: These models systematically incorporate sustainability, social impact, and governance ratings into the investment evaluation process.

For example, Steadfast Equity demonstrates its focus on ethical investing by prioritizing opportunities that contribute positively to the broader economy. The firm’s commitment to socially responsible investment extends to its relationships with investors.

The Importance of Due Diligence

Beyond metrics and ethical considerations, thorough due diligence is critical in private credit investing. This includes:

Conducting site visits and management interviews to gain firsthand insights.
Verifying information independently, as private credit borrowers often present data in less standardized formats compared to public companies.

Leveraging Professional Expertise

For those new to private credit, professional advisory services can be invaluable. Experienced advisors can help navigate complex deal structures, uncover hidden risks, and compare terms to current market standards. This guidance can significantly improve investment decisions and risk management.

Private credit investments often lock up capital for several years, so taking the time to thoroughly understand both the quantitative and qualitative aspects is essential for achieving long-term success.

Conclusion: Private Credit's Role in Modern Investing

Private credit has grown into a $1.7 trillion asset class, reshaping fixed-income strategies and offering U.S. investors a compelling avenue for higher yields and portfolio diversification. By 2028, this market is projected to approach $2.8 trillion, underscoring its expanding influence in modern investment portfolios.

One standout feature of private credit is the performance of direct lending. It has historically delivered returns that are 90% as high as public equities but with less than a quarter of their volatility. Net returns for direct lending strategies typically range between 8% and 12%, significantly outpacing investment-grade corporate bonds. These returns are bolstered by the illiquidity and complexity premiums inherent in private credit investments.

Another advantage lies in floating interest rates, which help protect against rate fluctuations. Many segments of private credit are currently yielding above their 10-year averages, making them even more appealing in today’s market.

Private credit also enhances diversification due to its low correlation with global equities (approximately 0.3) and its secured structure. This combination not only reduces portfolio volatility but also serves as a hedge against inflation . Beyond the numbers, ethical considerations are increasingly shaping investment strategies, and private credit offers a way to align financial goals with sustainable practices.

For example, the transition to a more sustainable economy is estimated to require $300 trillion in investment by 2050, with credit expected to cover about 60% of the financing. However, sustainability-focused private credit has only attracted $50 billion so far, compared to over $650 billion in sustainability-focused private equity. This gap highlights a significant opportunity for investors seeking impact-driven returns.

Steadfast Equity exemplifies this approach by offering bond options that combine competitive returns with ethical investment principles. Their offerings include annual percentage yields (APY) ranging from 10.0% for 1-year monthly payment bonds to 18.5% for 5-year compounded returns, demonstrating how private credit can deliver strong yields while supporting responsible investment goals.

Though private credit requires multi-year commitments and thorough due diligence, it remains an attractive option when allocated at 5% to 15% of a portfolio. As traditional banks scale back their lending activities, private credit is stepping in to fill the gap. The $6 trillion asset-based finance market is expected to exceed $9 trillion, and the broader private credit market could reach $2.3 trillion by 2027. For investors aiming to diversify beyond traditional stocks and bonds while achieving higher returns and supporting sustainable initiatives, private credit is becoming an essential part of the investment landscape.

FAQs

Why is private credit becoming a popular investment choice compared to traditional bank loans or public bonds?

Private credit is becoming increasingly popular among investors, and it’s easy to see why. It offers the chance for higher yields, customized loan terms, and stronger protection against losses compared to traditional bank loans or public bonds. For those aiming to enhance returns while diversifying their portfolios, this option holds considerable appeal.

Another key advantage is its resilience to stock market fluctuations. Unlike investments that are closely tied to market swings, private credit can help stabilize overall portfolio risk. Its flexibility is another standout feature, allowing for tailored agreements that aren’t typically available in public bond markets. This means investors can align their investments more closely with their unique financial goals.

What risks come with private credit, and how do they affect potential returns for investors?

Private credit carries certain risks, such as illiquidity and lower recovery rates, which can directly affect returns. Illiquidity refers to the difficulty of selling these investments quickly, particularly during market downturns. This can sometimes lead to selling at less-than-ideal prices. Meanwhile, lower recovery rates mean that if a borrower defaults, the amount investors can recoup is reduced.

Because of these risks, investors often demand higher returns to compensate. While this can create opportunities for greater gains, it also brings added volatility and the potential for losses if not managed carefully. As a result, private credit tends to be more suitable for those with a long-term investment horizon and a higher appetite for risk.

What should investors consider to ensure private credit investments align with ethical and sustainable goals?

When choosing private credit investments, taking environmental, social, and governance (ESG) factors into account is key. This involves looking at how a company affects the environment, its commitment to social responsibilities, and the strength of its governance practices. These considerations not only contribute to better societal outcomes but can also help manage risks and encourage long-term growth.

Private credit strategies rooted in ethical principles often align with goals of sustainable investing. They promote responsible use of capital and back initiatives such as climate transition efforts. By combining financial returns with positive environmental and social contributions, investors can align their portfolios with both their values and financial goals.