So, What Is Private Credit?
Think of private credit as lending that happens outside the traditional banking system. Instead of a company going to a nationalised or commercial bank for a loan, it borrows directly from a non-bank lender. These lenders are typically specialised investment
funds or asset managers who negotiate the loan terms—like interest rates and repayment schedules—privately with the borrower. This process offers speed and flexibility that banks, often constrained by stricter regulations since the 2008 financial crisis, cannot always provide. For borrowers, it’s a crucial alternative to get capital for growth, acquisitions, or other projects that don't fit the rigid criteria of conventional bank lending.
Where the Money Comes From
The capital for this massive market comes from large, sophisticated investors seeking higher returns than those offered by public bonds or government securities. The primary sources are institutional investors like pension funds, which manage retirement savings for millions, and insurance companies. Sovereign wealth funds (government-owned investment funds), university endowments, and even very wealthy families also pour significant capital into private credit funds. These investors give their money to professional fund managers who then find and vet lending opportunities. In return for tying up their capital for several years—typically five to ten—these investors expect to earn higher interest payments, which are often structured with floating rates to protect against inflation.
Where the Money Goes
The recipients of private credit are diverse, but the sweet spot has traditionally been mid-sized companies that are too large for small business loans but not yet big enough to issue public bonds. These firms use the funds for a variety of purposes, including expanding operations, financing acquisitions, or simply managing working capital. Another major user of private credit is the private equity industry, which uses these loans to finance leveraged buyouts (LBOs) of companies. Increasingly, private credit is also funding specific assets, with loans backed by collateral like real estate, aircraft, and even music royalties.
The Boom in India
While a global phenomenon, the private credit market in India is rapidly maturing and becoming a vital part of the financial ecosystem. In the first half of 2026 alone, investments stood at $3.5 billion across more than 100 deals. A significant trend is the rise of domestic funds, which now account for about 74% of the deal value, showing a strong local presence and understanding of mid-market borrowers. In India, this capital is flowing heavily into sectors like real estate for project funding, as well as healthcare and consumer-focused businesses. The demand is driven by companies needing flexible capital for refinancing, acquisitions, and growth in a market where traditional lenders can be more cautious.
Understanding the Risks
Despite its benefits, private credit is not without risks. For investors, the primary risk is illiquidity—unlike a public bond, a private loan can't be sold easily, and capital is often locked up for years. There is also greater opacity; because the deals are private, there is less public information about the borrower's financial health. This lack of transparency has raised concerns among regulators about lending standards and what might happen in an economic downturn. For borrowers, the flexibility comes at a cost, as interest rates on private loans are typically higher than bank loans. If a company's performance falters, it can struggle to make these higher payments, potentially leading to default.
