When a company needs to borrow money, you might picture them going to a bank or issuing bonds on a public market like the New York Stock Exchange. But there's another major source of funding that operates behind the scenes: private credit.

Think of it as direct lending from one company to another, without the usual intermediaries. Instead of banks, the lenders are often specialized investment firms, pension funds, or insurance companies. They negotiate loans directly with borrowers, creating customized deals that aren't available to the general public.

The easiest way to understand private credit is to see how it stacks up against public debt, like corporate bonds you can buy and sell on an exchange.

The most important distinction is liquidity. Public debt, like a stock, can typically be sold quickly. Private credit is different. These loans are designed to be held by the original lender until they're paid back.

Why would an investor lock up their money in an illiquid asset? For a higher potential return. Because private credit investments can't be easily sold, they come with an “illiquidity premium.” Lenders demand higher interest rates to compensate for the lack of flexibility.

For borrowers, especially mid-sized companies that might be too small for public markets or find bank loans too restrictive, private credit offers a valuable alternative. It provides access to capital with speed and flexible terms they can't get elsewhere. This relationship creates a distinct and growing corner of the financial world, separate from the public markets most of us see every day.