What Is Private Credit?
At its simplest, private credit is lending that happens outside of the traditional banking system. Think of it as non-bank lending. Instead of a company going to a large bank for a loan, it borrows directly from a specialized fund. These loans are privately
negotiated between the lender and the borrower and are not traded on public markets like stocks or bonds. This form of financing became much more common after the 2008 financial crisis, as new regulations made it more difficult for traditional banks to issue certain types of loans, creating a gap that non-bank lenders were ready to fill.
How the Money Flows
The process starts with a private credit fund, run by an asset manager. This fund raises capital from investors, who are typically large institutions like pension funds, insurance companies, and sovereign wealth funds. High-net-worth individuals are also increasingly participating. The fund manager then sources and negotiates loan agreements directly with companies seeking capital. These companies use the funds for various purposes, such as financing an acquisition, expanding operations, or refinancing existing debt. In return for the loan, the company pays interest, which generates returns for the fund's investors.
Why Companies Choose Private Credit
For borrowing companies, private credit offers several advantages over traditional bank loans or issuing public bonds. The primary benefits are speed, flexibility, and certainty. Negotiating directly with a single lender or a small group is often much faster than the complex process of a bank loan or a public offering. Lenders can also create highly customized loan terms, known as covenants, that are tailored to the borrower's specific needs—a level of flexibility that banks may not offer. This makes it an attractive option for mid-sized companies that may be too small or complex for public markets.
The Different Types of Private Lending
Private credit isn't a one-size-fits-all category. It includes several strategies. The most common is 'direct lending', which involves making a loan directly to a company. These are often 'senior secured' loans, meaning the lender is first in line to be repaid if the borrower faces financial trouble. Other forms include 'mezzanine debt', a hybrid of debt and equity; 'distressed debt', which involves buying the debt of companies in financial difficulty; and 'asset-based lending', where loans are secured against specific company assets.
The Investor's Perspective: Risks and Rewards
Investors are drawn to private credit for the potential of higher yields compared to traditional fixed-income investments like government or corporate bonds. Many loans have floating interest rates, which can be beneficial when central bank rates are rising. However, the asset class carries significant risks. The biggest is illiquidity: because these loans aren't publicly traded, an investor's capital is typically locked up for several years. There's also credit risk—the chance that the borrower will default on the loan. Finally, the market is known for its opacity, as the loans are not priced daily, which can make it difficult to assess their true value, especially during economic stress.
The Indian Context
While still small compared to the US market, India's private credit scene is growing rapidly. In the first half of 2026, the market saw investments of US$3.5 billion across more than 100 deals. A notable trend is the increasing dominance of domestic capital, with local funds accounting for 74% of deal value in H1 2026. Sectors like real estate, healthcare, and food and beverage are leading the way in attracting this form of capital. The growth is driven by companies seeking funds for refinancing, project funding, and acquisitions from alternative lenders as traditional sources leave gaps in the market.
