Retail Finance Credit – Capital Fund International (2024)

FAQs

How does a credit fund work? ›

Private credit funds—like private equity—raise capital from investors, but they make loans rather than buying equity. Most private credit funds are not leveraged, but a minority do borrow money or use derivatives to enhance their returns.

The tradeoff with using a private lender is that interest rates tend to be higher than those you would find in a bank. The primary reason is because loans that cannot be funded by a bank tend to be riskier. Private corporations or individuals use higher interest rates to offset the additional risk they take on.

Private credit is where a non-bank lender provides loans to companies, typically to small and medium size enterprises that are non-investment grade.

Private credit securities may be rated in the lowest investment grade category or not rated. Such securities are considered to have speculative characteristics similar to high yield securities, and issuers of such securities are more vulnerable to changes in economic conditions than issuers of higher-grade securities.

A credit opportunities fund is essentially a debt fund which invests in lower rated (riskier) debt securities – AA and below – than a regular income fund, which is AAA/AA+ oriented. Lower-rated debt securities offer higher returns than highly-rated debt paper to compensate the investor for taking higher risk.

Some examples include PIMCO's flagship open-end credit and direct lending fund, a fund which rolled investments from a PE-style fund into a distressed senior credit opportunity hedge fund, and the formation of two hybrid funds which invest in mortgage-backed assets and other structured products.

Private credit is typically floating rate and caters to relatively small borrowers with high leverage. Such borrowers could face rising financing costs and perform poorly in a downturn, particularly in a stagflation scenario, which could generate a surge in defaults and a corresponding spike in financing costs.

Private student loans often require an established credit record or a cosigner. Interest may be tax deductible. Interest may be tax deductible.

Private student loan funds are usually disbursed (sent) directly to your school's financial aid office. Personal loan funds are deposited directly into the borrower's bank account.

In 2023, the SEC finalized private fund adviser rules and amended Form PF for private fund reporting. These final rules aim to enhance the regulation of certain private credit fund advisers and provide more visibility into the private fund markets for investor protection and financial stability monitoring purposes.

How much money is in private credit? ›

The private credit market, in which specialized non-bank financial institutions such as investment funds lend to corporate borrowers, topped $2.1 trillion globally last year in assets and committed capital.

Private credit and private equity are both alternative assets that could be attractive to investors looking for different benefits for their portfolios. Private credit may be appropriate for investors seeking relatively stable and predictable returns that often exceed those of bonds and other fixed-income assets.

You will sometimes see private debt and private credit used interchangeably. However, an important distinction is that private credit is just one type of private debt. At PitchBook, we define private credit, or direct lending, as directly originated loans to corporate borrowers that are not broadly syndicated.

Private credit is an umbrella term referring to a loan extended to a privately held company. Private credit provides capital to companies that may not otherwise be able to access the traditional loan market. Repayment of the loan is often secured by a pledge of the borrower's assets.

Private credit funds say they can accommodate borrowers whose credit metrics make them ineligible for a bank loan (as is the case for many fast-growing but loss-making companies) or that require very flexible terms. Another advantage is that the pricing of private deals is often set up front.

Credit Risk Mutual Funds are debt funds that invest in low-credit quality debt securities. These funds have higher risks since they invest in low-quality instruments. Securities with a low credit rating tend to offer higher interest rates.

Credit in Lending and Borrowing

There are many different forms of credit. Common examples include car loans, mortgages, personal loans, and lines of credit. Essentially, when the bank or other financial institution makes a loan, it "credits" money to the borrower, who must pay it back at a future date.

The Bottom Line. Investing in private credit involves making loans to companies or individuals and collecting interest payments, while private equity investors acquire an ownership stake in a company whose shares don't currently trade on the public markets.

Credit money is the creation of monetary value through the establishment of future claims, obligations, or debts. These claims or debts can be transferred to other parties in exchange for the value embodied in these claims. Fractional reserve banking is a common way that credit money is introduced in modern economies.