Private credit: what is it and how does it work?

The term ‘private credit’ refers to loans from non-bank lenders to companies. Unlike corporate bonds, they are not publicly traded. Media outlets sometimes refer to this service as ‘shadow banking’, although this label is not entirely accurate; shadow banking covers much more than just lending. For many medium-sized companies, private credit is an important source of financing.

Private credit is not a new phenomenon, but it has grown considerably in the years following the 2008 financial crisis. According to analysts’ estimates, the US private credit market was worth around $1.6 trillion in 2025. In Europe, the figure amounts to around €500 billion. As there is no clear-cut definition of private credit, there are no exact figures available. The total worldwide market for government and corporate bonds was worth $40 trillion last year.

Why has the private credit sector grown so rapidly?

We need to look back to the 2008 financial crisis to understand the growth in private credit. The criteria that companies or consumers must meet to obtain a bank loan have become much stricter since then. In addition, banks have been obliged to hold more capital in proportion to the loans they extend, as they run risks on loans that will not be repaid. The technical term for the reserve capital banks must hold is ‘capital buffers’.

Larger capital buffers should make banks more resilient to potential financial difficulties, but the stricter requirements have also caused banks to become more selective in their lending. Non-banks are not subject to such rules and have stepped in to fill the gap with additional forms of financing, referred to here as ‘private credit’.

More and more companies are opting for private credit for their financing needs. They cite faster, more flexible service as a reason for not taking out a traditional bank loan. For parties wishing to invest in private credit, the relatively high expected returns compared to some other asset classes is one of the attractive features. Investors’ preferences therefore align with companies’ financing needs, and the circle is thus complete.

What are the hallmarks of private credit?

Apart from the fact that no bank is involved, there is no clear-cut definition of what private credit precisely is. However, various characteristics can identify it. Here are some examples:

• The loan comes from a lender that is not a bank
• The loan terms are tailored to the borrower’s needs
• The value and terms of the collateral for a private credit loan are more flexible than those offered by banks
• The transaction is a private agreement between lender and borrower. No public information is typically available, unlike for securities
• The loan is granted for a period of five to seven years
• The interest rate paid by the borrower is typically variable

Are there any risks associated with private credit?

For the time being, there are no signs to suggest that private credit poses a major threat to the stability of our financial system. Nevertheless, supervisory authorities and investors are concerned about the growth of the private credit sector.

The quality of the investments is a cause for concern. The lending standards that apply to banks do not apply to private credit lenders. Within this sector, the standards governing the quality of corporate loans differ from standard practice in the financial sector.

Furthermore, it is difficult to assess the value of the market for private credit because investments in the sector are not publicly traded and there is therefore no market price available. The value of a private credit investment therefore depends heavily on subjective assessments.

Higher risk of default, higher interest rates

Companies with weaker financial standing can secure loans more easily from private credit lenders than from banks. To hedge against the risk of default, the lender often charges a higher interest rate. That increases the return on the loan for the lender, but it does not reduce the risk of default.

A lack of transparency only serves to heighten such concerns. As a rule, there is no publicly available information on institutions that provide private credit. Whether an institution and its investments are in good shape is often a matter of guesswork for outsiders.

Private credit lenders also often operate across national borders, making it difficult for supervisory authorities to gain a clear picture of an institution’s entire investment portfolio.

The private credit sector has never experienced a crisis as severe as those faced by the banking sector. Precautionary measures such as crisis drills – as regularly practised by banks – are less common in the private credit sector. This increases the risk of financially perilous situations arising.

Will private credit affect my insurer or pension fund?

Institutions that perform essential functions in society, such as insurers and pension funds, invest directly in private credit lenders as part of their portfolios. DNB is currently (as of 11 May 2026) looking into the private credit investments made by Dutch pension funds and insurers. The amounts are small compared to their overall investment portfolios.

When it comes to private credit, we must often rely on estimates. Financial supervisory authorities such as DNB are currently investigating the interconnections between private credit institutions and the regulated financial sector by gathering additional information.

It is difficult to assess the implications for pension funds, banks and insurers should a crisis arise in the private credit sector until the actual situation is clear.

Private credit meets specific needs such as returns for investors and seed capital for businesses – both positive factors. At the same time, it is difficult for supervisory authorities and anyone not directly involved with the lender to obtain information on its financial soundness and potential returns. It is therefore prudent to maintain a cautiously critical stance towards private credit.