A private credit firm lends money directly to companies rather than buying them. It steps into the space banks have retreated from, financing mid-market businesses and private-equity-owned companies with loans that never touch a public market. In return it earns a contracted yield and, crucially, a senior claim on the borrower's assets if things go wrong.
Where equity investors own the upside and absorb the first losses, credit investors own a promise to be paid, backed by covenants and collateral. The trade is deliberate: give up the unlimited upside of ownership in exchange for a higher, more predictable return and a place near the front of the queue.
Where they sit in the capital stack
Every financed company has a capital stack, an ordered list of who gets paid and in what sequence. Senior secured debt sits at the top, first to be repaid and last to take losses. Below it sit unitranche, second lien, mezzanine and finally equity, each accepting more risk for more return. Private credit firms choose where on that ladder to play.
A firm's identity is largely its rung. A senior direct lender prizes capital preservation and steady yield. A mezzanine or opportunistic fund reaches lower for equity-like returns, accepting that it may be wiped out in a bad restructuring. Understanding a credit firm means knowing which layer it underwrites.
How the loans are built
A direct loan is a negotiated document, not a traded bond. It carries a floating rate, typically a base rate plus a spread of several hundred basis points, so returns rise with interest rates. It carries covenants, the promises a borrower makes about leverage, coverage and behaviour, which give the lender levers to pull before a default rather than after.
Because these loans are illiquid and privately held, the lender does real underwriting: it knows the borrower, sets the terms, and often holds the loan to maturity. That closeness is the edge. It is also the risk, because there is no daily market price to warn you when a credit is deteriorating.
How they make money
Returns come from the coupon, paid quarterly, plus fees at origination and sometimes a small equity kicker. Because the income is contractual and senior, private credit produces steadier cash yields than equity strategies, which is exactly why insurers and pensions have poured into it as a bond substitute with more yield.
The whole model rests on avoiding losses, not maximising winners. One credit that defaults and recovers thirty cents can erase the spread earned on a dozen good loans. So the discipline that matters is downside underwriting: leverage kept sane, covenants kept tight, and the willingness to say no when a private equity sponsor pushes for terms that leave no margin for error.