What Exactly Is Private Credit?
At its core, private credit—also known as private debt—is lending that happens outside of traditional banking and public markets. Instead of a company taking out a loan from a bank or issuing bonds to the public, it borrows directly from a non-bank lender.
These lenders are typically specialised investment funds, asset managers, or other institutional investors. The borrowers are often mid-sized companies that may find bank lending too slow or inflexible for their needs. Since the 2008 global financial crisis, stricter regulations have made banks more cautious, creating a gap that private credit has eagerly filled. This form of financing offers speed, flexibility, and customised terms, which is why even larger companies now turn to it for funding expansions, acquisitions, or refinancing.
The Lending Journey Begins: Sourcing and Due Diligence
The private credit process starts long before any money changes hands. It begins with sourcing deals. Lenders, often called sponsors or asset managers, actively look for companies that need capital. Once a potential borrower is identified, the lender begins an intensive due diligence process. This is a deep-dive investigation into the borrower's financial health, business operations, and overall risk profile. Unlike a bank's automated scoring, this is a hands-on review of financial statements, cash flow projections, and business plans. Lenders are primarily concerned with downside risk—the likelihood of the company defaulting on its loan—so they scrutinise everything to ensure the business is capable of making its interest payments and eventually repaying the principal.
Structuring the Deal: Negotiation and Covenants
After due diligence, the lender and borrower negotiate the loan's terms directly. This is a key advantage of private credit, as it allows for highly customised agreements. Key points of negotiation include the interest rate (which is often a floating rate that moves with a benchmark), the repayment schedule, and any collateral required to secure the loan. A critical part of this stage is establishing covenants. These are rules the borrower must follow while the loan is active. They act as a safety net for the lender and can include financial covenants, which require the borrower to maintain a certain level of operating performance, and negative covenants, which might restrict the company from taking on more debt or selling assets without permission.
The Life of the Loan: Monitoring and Repayment
Once the deal is signed and the funds are deployed, the lender’s job is far from over. Active oversight is a defining feature of private credit. Managers continuously monitor the performance of the borrowing company and ensure it adheres to the covenants agreed upon in the loan structure. This ongoing relationship allows lenders to spot signs of trouble early and work with the borrower to address issues before they escalate. Assuming all goes well, the borrower makes regular interest payments over the life of the loan. The final stage is repayment, where the borrower returns the principal amount at the loan's maturity. These loans are illiquid, meaning they are designed to be held to maturity rather than traded.
When Things Go Wrong: Defaults and Workouts
Of course, not every loan performs perfectly. If a borrower cannot make payments, it can lead to a default. However, defaults in private credit are often handled differently than in public markets. Because there are fewer parties involved, lenders can work directly with the struggling company to find a solution. This might involve renegotiating loan terms, a process known as a 'workout'. In India, private credit is a rapidly developing market, with domestic funds now accounting for 74% of deal value. Recent data from the first half of 2026 shows investments of $3.5 billion across more than 100 deals. While official default rates are often reported as low, some analysts argue the true rate of distress is higher, masked by mechanisms like payment-in-kind (PIK) interest, where unpaid interest is added to the loan balance.
