What is Private Credit?
In broad terms, private credit, often referred to as private debt, is defined as financing that uses private sources of capital which exclude traditional financial institutions, such as banks.
Private credit loans are directly negotiated between the lender and the borrower, and they are not traded on the secondary market.As a result, extensive due diligence, underwriting and tight negotiation of credit agreements is key in private credit as the loans are typically held until maturity and repayment.
Like public credit, private credit features subsets for its various asset classes. Another key similarity is that both public and private credit rank higher than equity in the capital stack for a borrower, thereby representing a lower risk for the lender. The more senior the loan, the lower the risk for the lender of potentially losing money in the event of the borrower’s default or bankruptcy. This means they are first in line to collect interest payments and seek reimbursement. Consequently, the lower the investor or lender’s seniority is in the capital stack, the higher the expected return or the interest rate.
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