Private Credit
Private credit is non-bank lending provided by private funds or investors, typically to companies, sponsors, or asset-backed borrowers.
Allocator relevance: A core sleeve for income and downside protection—but requires diligence on underwriting standards, covenants, and liquidity mismatch.
Expanded Definition
Private credit strategies include senior secured, unitranche, mezzanine, distressed, and specialty finance. Returns come from yield and structure (security, covenants), but risks include default cycles, refinancing risk, and illiquidity. In benign cycles, credit can look stable; stress periods reveal true underwriting quality and covenant strength.
Allocators evaluate private credit based on downside behavior, recovery expectations, and manager discipline.
How It Works in Practice
Managers source loans, underwrite borrowers, negotiate covenants, and monitor performance. Portfolio construction emphasizes diversification, industry exposure, and risk limits. Liquidity terms are often long-duration and must align with liquidity budgets.
Decision Authority and Governance
Governance includes strict underwriting standards, concentration limits, and monitoring escalation processes. LPs diligence whether the manager can enforce covenants and protect capital in distress.
Common Misconceptions
- Private credit is “safe yield.”
- Defaults are the only risk (spread compression and refinancing matter).
- Covenants don’t matter in strong markets.
Key Takeaways
- Underwriting and covenant quality define downside outcomes.
- Liquidity terms must match portfolio liquidity needs.
- Stress-testing credit is non-negotiable.