Private Credit Has Some Debt

The simple story of private credit is that private credit funds raise money from investors and use the money to make loans. The investors’ money is locked up for a long time, so there is no maturity mismatch: Unlike, say, a bank, a private credit fund can hold its loans to maturity and will never have to give investors their money back early; there can never be a “run” on private credit funds. Sure, certain retail private credit funds — non-traded business development companies — promise to give investors up to 5% of their money back each quarter, but other types don’t. And those outflows are small and predictable, so those BDCs will never have to do fire sales of loans to meet redemptions.1

This story is, approximately, half true, in the crude sense that about half of the money that private credit funds use comes from their investors. The other half is borrowed. A private credit fund might raise $100 from investors, borrow $100 more, and make $200 worth of loans. This is a crude number — some funds will borrow less, others more — but “around 1x levered” is a decent ballpark estimate.2 Some of this borrowing comes from banks, which makes some people worry about systemic risk to the banking system, and some comes from the bond markets.