It’s all in the subject line. What is it? How does it work? And what’s the appeal for asset managers? (how do they make money on it)
In: Economics
Private credit can be broadly defined as corporate lending outside of typical, bank-originated channels. This type of lending stands in contrast to traditional, syndicated leveraged lending, where many investors own a small part of a large loan. Private credit loans are bilateral arrangements negotiated directly between a single borrower and lender.
Private lending offers benefits to both the borrower and lender. Loans can be originated quickly and relatively cheaply since there are no syndication, agent, or rating agency fees. Lenders can obtain non-standard covenant and collateral packages, and have greater flexibility to modify terms in special situations/distress.
Just like all lending, institutions make money on the difference between their funding cost and lending rate. For a manager taking outside money, they are earning a management fee just like they would for managing a bond or equity fund.
Sure, imagine private credit as a special club where you lend money to businesses instead of banks. These businesses might be too small or too unique for regular banks. Asset managers like it because they make money from interest when these companies pay back with a little extra for the favor of borrowing that money. It’s like being paid back your buddy’s ice cream money with interest!
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