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Lesson 1 of 8 · 5 min

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Courses · Private credit in eight lessons

What private credit is, and why it grew

Loans made by funds rather than banks, to companies too small or too indebted for the public bond market. A market that has grown to nearly $1.7 trillion, much of it in the last few years.

In this lesson

  • Terms: Private credit, Direct lending, BDC, Form PF
  • To work through: a worked example, a 27-second film, 3 check questions

Underlined terms show their definition when you rest on them or tap them.

Private credit is lending that does not happen through banks or public markets. Federal Reserve staff define it as debt-like, non-publicly traded instruments provided by non-bank entities, mostly private credit funds and business development companies (BDCs). The loans are agreed directly between lender and borrower and are not traded on an exchange.

The borrowers are mostly middle-market companies, which the Fed note puts at $10 million to $1 billion of annual revenue, and many are owned by private equity funds. They are relatively small and carry a lot of debt, and they value what private lenders offer: speed, terms written for them, and a single lender or small group to deal with.

It grew fast. The Fed staff put the market at nearly $1.7 trillion as of June 2023, about half of it direct lending. The IMF describes it as having grown rapidly to give long-term finance to middle-market firms as banks became less willing to lend to them; the Fed note points to borrowers that cannot get enough from heavily regulated banks. The Boston Fed, using a different measure, put US private credit at over $1 trillion in 2026.

The money comes mostly from institutions. From SEC Form PF data at the end of 2021, the Fed note found pension funds held about 31% of private credit fund assets, other private funds 14%, and insurers and individual investors about 9% each, with family offices, sovereign wealth funds and wealthy individuals also important.

From the Fed’s figures (Form PF, end of 2021)

Who held private credit fund assets:

Public and private pension fundsabout 31% ($307 billion)
Other private fundsabout 14% ($136 billion)
Insurance companiesabout 9% ($92 billion)
Individual investorsabout 9% ($92 billion)

The rest is spread across other holders. Pensions’ $307 billion at 31% implies a total of roughly $1 trillion of fund assets in the data.

Key takeaway: why it matters to investors

Private credit has become one of the main things private markets investors buy, and one of the main ways private equity-owned companies are financed. Knowing who borrows, who lends and why it grew is the frame for every risk and return figure in the rest of this course.

Watch · 27 seconds

A company borrows from a fund, not a bank

Private credit is lending by investment firms rather than banks, directly to companies, with the loans held in funds rather than traded on markets.

Also: A loan repaid by ten thousand strangers

Check yourself

0 of 3 answered

Pick an answer to see why. Answer all 3 to finish the lesson.

  1. 1.Which of these is private credit?
  2. 2.Which companies borrow most from private credit?
  3. 3.In the Fed’s Form PF figures, which investors held the largest share of private credit fund assets?

3 questions left to finish the lesson.

Sources

The facts in this lesson were checked against these public pages on November 11, 2026. Examples use round invented numbers. Simple examples; terms vary by fund.

  1. Private Credit: Characteristics and Risks (FEDS Notes, February 23, 2024; Fang Cai and Sharjil Haque), Board of Governors of the Federal Reserve System. Definition (debt-like, non-public instruments from non-bank lenders, mostly through funds and BDCs); nearly $1.7 trillion as of June 2023, direct lending about $800 billion or half; borrowers typically middle-market firms with $10 million to $1 billion of revenue; direct loans typically senior secured; about 15% hybrid loans, more junior; almost all floating rate; average maturity around five years, about 16% due in 2024; spreads above syndicated term loans; mean interest coverage about 2.0x vs 2.7x for leveraged loans (2023); default rates low vs syndicated loans through October 2023, not yet tested by a prolonged recession; post-default value around 33% vs 52% syndicated loans and 39% high-yield bonds (KBRA DLD); recent deals often without financial maintenance covenants (industry commentary); Form PF Q4 2021: pensions about 31% of private credit fund assets, other private funds 14%, insurers and individuals about 9% each; BDCs created by the Small Business Investment Incentive Act of 1980.
  2. Global Financial Stability Report, April 2024, Chapter 2: The Rise and Risks of Private Credit (executive summary), International Monetary Fund. Private credit has grown rapidly to provide long-term financing to middle-market firms, typically floating rate, to relatively small, highly leveraged borrowers; customised terms; banks less willing to lend to the middle market; semi-liquid funds could create first-mover and run risks; uncertainty about valuations and incentives to delay recognising losses.
  3. Early Warning Signals in Private Credit? What BDC Portfolios Reveal about Emerging Risks (Current Policy Perspectives 26-6, August 5, 2026), Federal Reserve Bank of Boston. US private credit over $1 trillion; PIK means adding unpaid interest to principal; share of BDC loans with PIK rose from about 6% in early 2022 to about 10% by early 2026; median BDC spreads 4 to 5 percentage points over SOFR, narrowing about 1 point over two years; some BDCs are publicly offered but not listed and often have repurchase programmes.

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