Private credit, also known as private debt, is an asset type made up of corporate, non-bank, non-publicly traded loans. Businesses tend to negotiate private credit loans with lenders when they want to raise over $20 million in financing and aren't large enough to access the public markets. Private credit enables businesses to diversify their funding sources and access alternative sources of capital to fuel their growth, which is why private credit has grown over 10x in the past decade.
Private credit growth has exploded in the last decade. Today, private credit is larger than venture capital and stands at roughly $1 trillion in assets under management (AUM) globally.
In contrast with public credit, which is debt that is issued or traded on the public markets, private credit investments are illiquid, meaning that they cannot easily be bought, sold, or converted into cash.
In other words, you can't buy and sell private credit investments the way you might buy and sell bonds. (This illiquidity can pose a risk for investors, as private credit investments might be difficult to transfer to other investors. Private credit investments tend to have higher yields to compensate investors for this risk.)
Notable examples of private credit include specialty lending, residential lending, and direct corporate lending.
How does private credit work?
Private credit works much like a consumer loan, with regular interest payments calculated based off of loan utilization and maximum credit availability specified as part of a credit agreement.
However, private credit deals also have many characteristics that are not generally found in consumer or small business loans—characteristics that make it important for businesses to consider using technology to manage their private credit funding. For example, the term sheets and credit agreements that spell out the rules of private credit arrangements often take months to negotiate and may outline covenants or regular deliverables for borrowers to comply with and report on.
Why should fintechs understand private credit?
We've written in the past about how fintech cash flows work and how fintechs should think about debt capital.
But we haven't focused as much on the nature of fintech debt capital funding. Often, fintechs turn to private credit firms to access debt capital, as this type of funding isn't readily available from banks or venture capital firms.
For example, companies that offer their customers credit or other financial offerings will eventually need to navigate the private credit—and, more specifically, asset-based finance—ecosystem unless they want to keep all their originations on their own balance sheet.
As both technology and non-technology companies embrace trends like embedded finance and more and more non-financial businesses enter the fintech space, understanding and navigating the private credit space will become a key operational requirement for all companies, especially fintechs.
How do fintechs access private credit?
Fintechs often raise debt capital from private credit firms as part of a revolving credit facility in addition to their equity because they can use their receivables as collateral when raising debt to fund their new customer originations. Private credit enables fintechs to raise more money and grow much faster than they would be able to by relying on equity financing alone. (Finley customer Ramp has a great debt capital deep-dive here.)
In order to kick off talks with private credit providers, fintechs need a strong history of originations (e.g., in the form of a loan tape), assets to pledge as collateral for a credit facility, a sound business model and risk model, and a clear plan for how they will use the private credit loan to grow.
We think of the "front-end" of fintech as everything related to customer acquisition and underwriting, while we see the "back-end" as everything involving compliance and financial operations.
Today, there are a lot of resources on how to launch and optimize a fintech front-end, but very little information on how to build out a fintech back-office. We believe that how fintechs source and manage debt capital is a major part of making sure that their "back-end" operations are running smoothly. (For more, check out our guide to the modern lending tech stack.)
How large are private credit deals?
Because private credit deals are negotiated bilaterally (between the lender and borrower), there is far less transparency in private credit than there is in public credit. That lack of transparency makes it difficult to calculate precise statistics on debt capital.
Two macro trends are clear, however: private credit is growing and private credit deal sizes are increasing. S&P Global data shows that the AUM of private debt funds has grown 10x in the past decade. And the international law firm Proskauer found in a 2020 study that deals are growing in size, with over half of private credit deals now over $200 million.
What are the largest private credit investors?
The publication Private Debt Investor has created a list of the top 100 private credit funds that identifies the top 10 largest private credit funds as: Ares Management, Goldman Sachs Asset Management, Blackstone, AXA Investment Managers, Oaktree Capital Management, HPS Investment Partners, Intermediate Capital Group, Apollo Global Management, Cerberus Capital Management, and Sixth Street.
Want to learn more?
Understanding the private credit and asset-based finance ecosystem and selecting the right private capital provider is essential to the long-term success of your fintech.
However, sourcing and raising debt capital is just the first step in navigating the capital markets and optimizing your funding mix. For your business to thrive, you'll need to make sure you're adopting the right tools and processes for maximizing your capital access after you successfully execute your credit agreement. Today's capital markets technology can automate your debt capital reporting, alert you to possible compliance issues, and help you adopt a proactive approach to debt capital management.
If you're interested in learning more about software that can help you manage your credit facility and scale your capital markets function, just schedule a demo or take a self-guided product tour from a Finley capital markets expert. We'd love to chat!
