Understanding Private Credit

What Is Private Credit?

Private Credit is a broad term, often defined differently by market participants. Ares defines Private Credit as loans or investments made by a single or small club of institutional managers to a company or asset. We believe Private Credit provides important capital that supports companies, real assets and global economies. Within Private Credit today, Ares broadly sees five distinct sub-sectors including the following:

Direct Lending

Private loans or investments directly to sponsor-backed or management-owned companies primarily based on cash flows, corporate enterprise value and assets (current assets, PP&E, receivables, etc.)

Alternative Credit

Private asset-based credit that invests in diversified pools of assets that generate contractual cash flows across a wide group of sectors and industries, including auto & aviation, consumer, mortgages, equipment leasing, fund finance and more

Real Estate Debt

Private lending to finance the purchase or development of real estate assets

Infrastructure Debt

Private lending to finance the purchase or development of infrastructure projects

Opportunistic Credit

Private lending to healthy companies and businesses in need of transitional capital through flexible debt and/or non-control equity solutions

Key Questions on Private Credit

There is broad agreement that the asset class has experienced significant growth, but Private Credit is getting more attention than ever. This report will primarily focus on the Direct Lending segment within Private Credit. Here is what we have been asked:

1. How did Private Credit become the "hot" new asset class?
2. How is Private Credit different than bank lending? Isn't it lending to the smallest, most risky companies to which banks won't lend?
3. How has Private Credit performed historically vs. other asset classes?
4. Is there a Private credit bubble creating systemic risk for our economy?
5. Without regulation like banks, do Private Credit funds - particularly retail funds - pose a systemic threat?