Key Takeaways
- • Lord Abbett's Michael Cibelli, CFA, Portfolio Specialist for Alternatives, defines private credit as alternative borrowing and lending that takes place outside the traditional banking system and publicly traded capital markets.
- • Private credit loans are privately originated, not publicly traded like bonds, and are generally held to maturity, which the firm says contributes to lower price volatility relative to public debt.
- • Borrowers cite five reasons for choosing private lending: fewer lenders, bespoke terms, greater execution certainty, deal confidentiality, and reduced reporting and ratings burdens.
- • Lord Abbett estimates the traditional U.S. private corporate lending market at $1.7 trillion, while some estimates place the broader private credit market, including real estate, infrastructure and asset-based lending, at $40 trillion.
Summary
Lord Abbett has published an educational explainer on private credit, presented by Michael Cibelli, CFA, Portfolio Specialist, Alternatives: Private Credit. According to the piece, private credit is an alternative form of borrowing and lending that operates outside the traditional banking system and the publicly traded capital markets. Because the loans are privately originated and not traded like bonds, lenders typically expect to hold them until maturity. The firm notes that this creates an ongoing relationship between lender and borrower for the life of the loan, and that the non-traded nature of the loans contributes to their lower price volatility relative to public debt.
The explainer contrasts the financing options available to different borrowers. Smaller or less established businesses have historically relied on commercial banks, or on non-bank lenders specializing in middle-market loans. Larger companies can tap public bond and loan markets through major investment banks, but may instead borrow directly from private lenders such as private credit funds, Business Development Companies (BDCs) or interval funds. Lord Abbett acknowledges that public issuance is typically the lower-cost option, since investors in public markets do not require an illiquidity premium to the same degree.
The firm cites five reasons borrowers may still prefer private markets: working with a small number of long-term lenders rather than broadly syndicated loans with potentially hundreds of participants; negotiating bespoke terms; greater certainty over the amount of capital available and final deal terms, whereas public loan raises are conducted on a best-efforts basis and terms can shift over longer closing timelines; preserving deal confidentiality; and avoiding extensive reporting and ratings requirements.
The definition of private credit has broadened beyond corporate lending. Historically it referred to private, non-traded loans to U.S. companies, a market Lord Abbett estimates at $1.7 trillion. Today the term can also encompass real estate project loans, infrastructure financing and asset-based loans secured by inventory, equipment, receivables or loan pools. Including these, the firm cites estimates placing private credit at roughly $40 trillion. The piece is an educational overview rather than a performance or product announcement, and it points to a forthcoming explainer on direct lending.
The explainer contrasts the financing options available to different borrowers. Smaller or less established businesses have historically relied on commercial banks, or on non-bank lenders specializing in middle-market loans. Larger companies can tap public bond and loan markets through major investment banks, but may instead borrow directly from private lenders such as private credit funds, Business Development Companies (BDCs) or interval funds. Lord Abbett acknowledges that public issuance is typically the lower-cost option, since investors in public markets do not require an illiquidity premium to the same degree.
The firm cites five reasons borrowers may still prefer private markets: working with a small number of long-term lenders rather than broadly syndicated loans with potentially hundreds of participants; negotiating bespoke terms; greater certainty over the amount of capital available and final deal terms, whereas public loan raises are conducted on a best-efforts basis and terms can shift over longer closing timelines; preserving deal confidentiality; and avoiding extensive reporting and ratings requirements.
The definition of private credit has broadened beyond corporate lending. Historically it referred to private, non-traded loans to U.S. companies, a market Lord Abbett estimates at $1.7 trillion. Today the term can also encompass real estate project loans, infrastructure financing and asset-based loans secured by inventory, equipment, receivables or loan pools. Including these, the firm cites estimates placing private credit at roughly $40 trillion. The piece is an educational overview rather than a performance or product announcement, and it points to a forthcoming explainer on direct lending.
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