Private Credit (PC)

Private Credit (PC) refers to non-bank lending strategies that provide capital to companies through privately negotiated debt instruments rather than public markets or regulated bank balance sheets. These strategies generate returns primarily through contractual cash flows, supported by structural protections such as seniority, collateral, covenants, and active monitoring.

From an allocator perspective, Private Credit is not simply “lending outside banks.” It is an asset class defined by downside risk control, underwriting discipline, and the manager’s ability to preserve capital through adverse scenarios while delivering predictable income.

How allocators define Private Credit exposure

Allocators do not treat Private Credit as a single strategy. Exposure is segmented across several structural dimensions:

• Position in the capital structure: senior secured, unitranche, mezzanine, subordinated
• Source of repayment: operating cash flow, asset-based collateral, NAV-linked recovery
• Borrower profile: sponsor-backed versus non-sponsored, middle-market versus upper-market
• Control mechanisms: covenants, collateral enforcement rights, monitoring authority
• Cycle sensitivity: defensive income strategies versus opportunistic or stressed credit

A CIO is rarely asking, “Do we allocate to Private Credit?”

Instead, the framing question is:

“Which credit strategies deliver durable yield while preserving capital across cycles?”

Core strategies within Private Credit

Private Credit encompasses a family of strategies with distinct risk-return profiles:

• Senior secured direct lending
  First-lien loans backed by collateral and covenants, emphasizing principal protection and yield stability.
• Unitranche and stretch senior lending
  Blended senior structures offering higher yield in exchange for complexity in intercreditor positioning.
• Mezzanine and subordinated debt
  Junior capital with enhanced pricing, often accompanied by equity kickers, carrying higher loss severity risk.
• Specialty finance
  Asset-backed, recurring revenue, receivables, IP-backed, or structured lending with idiosyncratic risk drivers.
• NAV lending and hybrid facilities
  Credit secured against fund or portfolio-level assets, increasingly used for liquidity management and capital efficiency.
• Opportunistic and stressed credit
  Situational strategies targeting mispricing, dislocation, or borrower distress, with higher underwriting complexity.

Each strategy sits differently on the yield, duration, and loss distribution curve. Allocators evaluate them independently rather than aggregating all exposure under a single “credit” bucket.

How Private Credit fits into allocator portfolios

Allocators typically use Private Credit to achieve:

• Predictable contractual income with defined repayment schedules
• Lower volatility relative to public fixed income and equity markets
• Downside protection through seniority, collateral, and covenants
• Reduced correlation during public market drawdowns
• Selective inflation resilience via floating-rate structures

The role of Private Credit varies by allocator profile:

• North American pensions: income stability and downside protection through senior secured lending
• European multi-family offices: lower-volatility specialty finance and asset-backed strategies
• Middle East sovereign allocators: structured and opportunistic credit aligned with strategic sectors
• U.S. private banks and RIAs: direct lending positioned as private income with collateral support

(Representative categories only. No firm-level attribution.)

How allocators evaluate Private Credit managers

Allocator conviction increases when a Private Credit manager demonstrates:

• Conservative, repeatable underwriting discipline
• Clear articulation of collateral rights and covenant enforcement
• Transparency around loss-given-default assumptions
• Proven deal origination channels not dependent on aggressive pricing
• Scalable portfolio monitoring and intervention processes
• Evidence of capital preservation and recovery execution across cycles

Allocators are not optimizing for headline coupon.

They are optimizing for predictable coupon with controlled downside outcomes.

What slows allocator decision-making

Private Credit diligence commonly stalls due to:

• Reliance on sponsor underwriting without independent validation
• Ambiguity around enforcement rights and recovery timelines
• Exposure to cyclical sectors without structural protection
• Portfolio construction that concentrates correlated risks
• Assumptions that depend on continued benign credit conditions
• Insufficient detail on monitoring, covenant breaches, and intervention authority

Opacity during stress scenarios materially erodes allocator confidence.

Common misconceptions about Private Credit

“Higher yield means better risk-adjusted returns”
Yield without structural protection increases loss severity.

“Unitranche is inherently riskier than senior lending”
Risk depends on leverage, sector exposure, documentation, and controls.

“Borrower quality is static”
Credit risk evolves; underwriting must anticipate deterioration.

“NAV lending equals equity risk”
Properly structured NAV facilities can provide strong downside protection and priority repayment.

Key allocator questions during diligence

• How are deals sourced without overpaying for access?
• What explicitly disqualifies a borrower from investment?
• How are covenants monitored and enforced in practice?
• What actions are taken when performance deteriorates?
• Which exposures are most sensitive to rate changes, sponsor behavior, or macro shocks?
• How does monitoring scale without dilution of oversight?