June 6, 2021 | By: Sound Choices

What is Private Credit?

3 min read

The act of a private lender extending debt capital to a borrower is a financial service that has existed for thousands of years.

However, private credit, as an asset class, has only emerged over the last 20 years as an alternative or compliment to traditional fixed income and an important source of yield.

Defining Private Credit

Broadly speaking, private credit or private debt (used interchangeably) typically refer to debt investments that are not financed by banks and are not issued or traded in an open market. At its core, private credit is any non-bank lending activity.

Private Credit Refers to the Lender, Not the Borrower

It’s important to note that the term ‘private’ refers only to the entity providing the debt and not to the borrowing entity, which could be publicly listed or privately held.

Similarities to Traditional Debt

Like traditional forms of debt capital, private credit is typically used by borrowers to obtain capital for purposes such as:

  • financing business expansion activities
  • working capital needs and infrastructure
  • funding infrastructure or real estate development

How Private Credit Differs from Traditional Debt

Unlike traditional forms of debt capital, private credit loans feature attractive structuring elements that, when compared to other sources of capital, are highly customizable, secure and, in the current interest rate environment, typically attract a relatively higher interest rate.


Currently, over 70%* of the investor capital flowing into private credit comes from institutional investors, but availability is increasing with the introduction of publicly traded business development companies and closed-end funds focused on private credit opportunities.

To find out more about private credit, please speak to your financial advisor or visit AGF.com/PrivateCredit.

 


*Source: “Financing the Economy 2018″ Alternative Credit Council. https://www.aima.org/educate/aima-research/fte-2018.html.
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June 6, 2021
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