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Private Credit: What It Is, the Main Types, and How It Differs from Regular Bonds
Private credit keeps coming up in conversations with people who have money sitting in bonds or cash and want something different. It's basically lending money directly to companies or projects outside the public markets. Instead of buying a corporate bond on an exchange, you're part of a loan arranged by a specialized fund or manager. The borrower pays interest, and you get your principal back at the end or when the loan refinances. It's not something you can sell tomorrow if you need cash, but that's the point for many folks.
There are a few main types I see most often.
Direct lending is the straightforward one. Funds make senior secured loans to middle-market companies—think businesses bringing in $10 million to a few hundred million in revenue. These loans sit at the top of the repayment line if the company hits trouble. Rates usually float with SOFR or similar, so they move when broader interest rates change. It's the most common slice of private credit and feels closest to traditional lending.
Mezzanine debt is a step riskier. It ranks below senior loans, so you get paid after those lenders. To make up for it, the interest rate is higher and deals often include equity warrants or other sweeteners. Companies use mezzanine for buyouts, expansion, or when banks won't stretch further. It's more flexible but you feel the pain more in a default.
Distressed credit goes after opportunities in companies already struggling. Managers buy debt at a discount, either to help restructure the business or take control through bankruptcy. Recoveries can be solid if things turn around, but it's choppier work with bigger swings.
Special situations cover everything else—bridge loans, royalty financing, litigation funding—but the first three are the big ones for most portfolios.
How Private Credit Compares to Traditional Bonds
Traditional bonds are issued by big companies or governments and trade publicly. You can buy or sell them fairly easily on any given day. Yields are public knowledge, terms are standardized, and rating agencies give their opinion. Liquidity is the big advantage. You can exit a position without waiting years.
Private credit is negotiated deal by deal. Covenants are often stricter and tailored. There's way less public information, so the manager does heavy upfront digging. Liquidity is basically zero until maturity or a refinance—you're committed. That illiquidity is why the yields tend to run higher than similar public bonds. Defaults take longer to resolve because there's no ready market to sell the loan, but senior positions have historically recovered decent percentages.
A lot of families add private credit when they want more income than Treasuries are offering and they're okay locking money up for five to ten years. It doesn't replace all your bonds, but it can fill a gap when public markets feel expensive or rates are low. The manager you pick matters a ton—the difference between top and average performers is real.
That's the practical view from what I've seen. The space changes with interest rates and credit cycles, so details matter.
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