What are Private Debts / Private Credits?

By definition, private debts are credits that are either owned by or extended to private companies. They most commonly take place in the form of a loan lended by non-bank entities to privately-held companies, or financial institutions purchasing such loans in the secondary market.

The private debt funds took off during the Global Financial Crisis as regulations were placed on banks. These debts operate as direct lenders to the middle-market and attractive credit sources for leveraged buyouts, they promise investors the high-yielding opportunities that the public markets often fail to provide.

Currently, in the private markets, private debt takes up a substantial role, amounting to 10-15% of the total AUM. According to Perqin, private debts are expected to grow to $1.46 trillion by the end of 2025, expanding 11.4% annually.

Reasons for investment

Generally speaking, investors may consider private debt the low-risk approach for diversification. Private debts are generally a lower-risk investment compared to other alternative asset classes. They are also a practical alternative to fixed income investments.

Private debt also serves as a diversification strategy due to its low correlation to the public markets. Under a low interest rate environment, private debts offer attractive returns adjusted for risks. In addition, they can bring investors a reliable income stream due to its predictable, contractual returns based on interest rates charged.

Growth of the Private Debt Market

With the current low yields offered in the public market, investors are moving their capital from the public to the private credit markets.

According to a survey conducted by Preqin, around two thirds of investors indicated plans to increase their allocation in private credits.

Additionally, wider credit spreads and higher returns are seen in private credit compared to its public counterpart, accompanied by increasingly more protective contracts for lenders.