Private Credit

Private credit is lending to businesses by nonbank investors, outside the public bond market and the bank-led syndicated loan market. The Federal Reserve describes it as loans made by nonbanks on a one-to-one basis.

The main lenders are private debt funds and business development companies (BDCs), which are investment companies that lend to private businesses. Their money comes from pension funds, insurers and, increasingly, individual investors. Typical borrowers are midsize companies, often owned by private equity firms. Almost all the loans carry floating rates.

How big is it? In its May 2026 Financial Stability Report, the Federal Reserve put US private credit at about $1.4 trillion as of the second half of 2025. That was roughly 10% of all debt owed by US nonfinancial companies. A 2025 Fed staff note found the market had grown about five times since 2009. Estimates vary because definitions vary: the Financial Stability Board put the global total at $1.5 trillion to $2 trillion at the end of 2024.

Why it matters for lenders

Private credit competes with banks and also depends on them. Borrowers often pay more for speed, certainty and custom terms. Some highly leveraged companies turn to it when regulated banks will not lend. At the same time, banks lend to the funds. Fed staff found committed bank lending to private credit vehicles grew from about $8 billion in early 2013 to about $95 billion by late 2024.

Because the loans are not traded, prices and losses are harder to see. In its May 2026 report, the Fed noted that some private credit funds open to individual investors faced a jump in withdrawal requests and capped them. It judged the risk to the wider financial system limited and manageable.

How it works in practice

Private credit sits inside the broader world of alternative lending, but the two terms are not the same. In common use, private credit means loans to midsize and larger companies. Alternative lending also covers small business lenders, merchant cash advance funders, real estate bridge lenders and online platforms. Many of those smaller lenders raise their own lending capital from private credit funds. They then often owe the fund eligibility checks on each loan and regular loan-level reports, as a bank lender would.

Take a private debt fund that lends $40 million to a software company bought by a private equity firm. The fund's team underwrites cash flow and leverage, often using measures like the debt-to-equity ratio. Fund strategies range from senior loans to mezzanine financing. The deal may include a loan covenant package, though Fed staff have cited industry reports that some recent large deals have no maintenance covenants.

The fund usually holds the loan to maturity and values it for its investors each quarter.