Key Takeaways
- • Lord Abbett portfolio specialist Michael Cibelli, CFA, defines private credit as an alternative form of lending that takes place outside the traditional banking system and publicly traded capital markets.
- • Private loans are originated privately and held to maturity rather than traded like bonds, which the article attributes to their lower price volatility relative to public debt.
- • Borrowers cite five main reasons for choosing private lenders: fewer long-term lenders, bespoke terms, greater execution certainty, deal confidentiality, and a reduced reporting and ratings burden.
- • The article notes that the private credit definition has widened from U.S. corporate loans, estimated at a $1.7 trillion market, to include real estate, infrastructure, and asset-based lending, which some estimate at $40 trillion.
Summary
Lord Abbett's Alternatives private credit specialist Michael Cibelli, CFA, explains in a video primer that private credit is an alternative form of borrowing and lending that operates outside the traditional banking system and the publicly traded capital markets. Because these loans are privately originated and not publicly traded like bonds, lenders typically expect to hold them until maturity. Cibelli notes that this arrangement matters to both sides: the lender holds the loan, and the borrower works with the same lender for the loan's life. The private, non-traded structure is cited as the source of the asset class's lower price volatility relative to public debt.
The article contrasts financing paths by business size. Smaller or less established businesses have historically relied on commercial banks, though some turn to non-bank lenders specializing in middle-market loans. Larger borrowers typically tap investment banks that raise capital through publicly traded bonds or syndicated loans. Some large borrowers, however, go directly to private lenders, including private credit funds, Business Development Companies (BDCs), and interval funds.
Cibelli acknowledges that public loans may be cheaper for large borrowers, since investors in illiquid private debt typically demand a yield premium. He identifies five reasons borrowers still favor private markets: they can partner with one or a few long-term lenders rather than a broadly syndicated group of potentially hundreds; they can negotiate bespoke terms; they gain more certainty over capital availability and deal terms, whereas public loan raises are conducted on a best-efforts basis and terms can shift before closing when rates or risk costs move; they preserve deal confidentiality; and they avoid extensive reporting and ratings requirements. He notes that periods of high volatility, such as COVID, heighten execution uncertainty in public loan markets.
The article also explains that the definition of private credit has broadened. Historically it referred to private, non-traded loans to U.S. companies, a segment estimated at $1.7 trillion. Today it can also encompass real estate project loans, infrastructure financing, and asset-based loans secured by inventory, equipment, receivables, or pools of loans. Including these, some estimate the market at $40 trillion.
The article contrasts financing paths by business size. Smaller or less established businesses have historically relied on commercial banks, though some turn to non-bank lenders specializing in middle-market loans. Larger borrowers typically tap investment banks that raise capital through publicly traded bonds or syndicated loans. Some large borrowers, however, go directly to private lenders, including private credit funds, Business Development Companies (BDCs), and interval funds.
Cibelli acknowledges that public loans may be cheaper for large borrowers, since investors in illiquid private debt typically demand a yield premium. He identifies five reasons borrowers still favor private markets: they can partner with one or a few long-term lenders rather than a broadly syndicated group of potentially hundreds; they can negotiate bespoke terms; they gain more certainty over capital availability and deal terms, whereas public loan raises are conducted on a best-efforts basis and terms can shift before closing when rates or risk costs move; they preserve deal confidentiality; and they avoid extensive reporting and ratings requirements. He notes that periods of high volatility, such as COVID, heighten execution uncertainty in public loan markets.
The article also explains that the definition of private credit has broadened. Historically it referred to private, non-traded loans to U.S. companies, a segment estimated at $1.7 trillion. Today it can also encompass real estate project loans, infrastructure financing, and asset-based loans secured by inventory, equipment, receivables, or pools of loans. Including these, some estimate the market at $40 trillion.
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