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Market Overview

Private credit is an $8 trillion market in the United States, comprised of numerous sub-markets that ultimately cater to the vast borrowing needs of consumers and small to medium sized businesses. Contrary to the highly standardized $40 trillion+ U.S. public credit market serving the needs of governments, financial institutions and large corporations, the U.S. private credit market has been historically unorganized and deeply fragmented.

"Private Credit" Defined

What exactly makes private credit, private? Two distinct, mutually exclusive features:
  1. 1.
    Debt security not listed on any exchange or freely-tradable in the public market
  2. 2.
    Credit products originated by a lender, whether bank or non-bank
Examples of sub-markets that coincide with feature 1 above include the structured credit market in the form of private debt securities, such as private asset-backed securities, as well as the U.S. private placement market, which are privately placed secured and unsecured bonds for investment grade companies in the U.S.
Examples of sub-markets that coincide with feature 2 above include the structured credit market in the form of anything not issued as a security, alternative/fintech lending, venture debt, mid-market loans and commercial loans.

Private Lending Pyramid

A certain hierarchy of private lending ultimately forms the basis of the U.S. private credit market.

At the bottom of the lending pyramid are the credit products offered to end borrowers, whether consumers or small businesses. These credit products range from small business loans offered by a regional bank, to buy-now-pay-later loans offered by a non-bank lender.

These banks and non-bank lenders are therefore one level higher in the private lending pyramid. However, at this stage, banks and non-bank lenders diverge as their own respective sources of capital they use to lend to their end customers (the borrowers at the bottom of the pyramid) are drastically different.

Banks are able to use deposits on hand from other customers, and, depending on their size, may be able to raise both debt and equity capital in the public market to fund their lending needs. Non-bank lenders on the other hand, have no such access to a deposit base and are typically much smaller entities with no direct access to low cost capital or public markets. Instead, non-bank lenders borrow from larger non-bank lenders or a group of private investors.

These larger non-bank lenders and private credit investors are therefore one level higher in the private lending pyramid.

At the top of this pyramid, are those ultimately lending to the larger non-bank lenders, which are typically banks, pension funds and other large institutional credit investors that seek exposure to private credit but are willing to accept much lower returns in exchange for much lower risk through extensive diversification.
The top of the pyramid is supported by all the individual private credit deals that are being sourced, structured and serviced at each rank below. The lower the private credit deal between lender and borrower takes place, the more concentrated the risk and therefore, the higher the return.