Bob FraserCFO & Macro Strategist | Data-Driven Investing Expert | Speaker & Author

Why is private credit rising now?

Name: Why is private credit rising now?
Uploaded: 2023-04-01T15:00:14+00:00
Duration: 38 s
Channel: Bob Fraser
Description: In this brief segment, the speaker defines private credit as direct lending to individuals or companies, analogous to bank loans such as mortgages or…

1 Apr 2023 · 1 min

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In this brief segment, the speaker defines private credit as direct lending to individuals or companies, analogous to bank loans such as mortgages or auto loans. He explains that private credit has become more popular because rising general interest rates, driven by the Federal Reserve, increase the absolute return on private credit. The private credit premium (the extra yield over the risk‑free rate) stays roughly constant, so when the risk‑free rate climbs, the total yield on private credit rises proportionally, making it more attractive to investors.

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I've seen a lot more interest in private credit than I had previously. And basically private credit just means making direct loans. So the same way a bank will loan somebody to buy a mortgage on their house or a car loan, it can be me lending either to an individual or more commonly to a company. And I think the reason that's become more popular lately is a couple of reasons. One, as general interest rates and the Fed has raised interest rates, private credit gets a premium to that. So if the risk-free rate is 0% and you get a 6% premium private credit, then you're still only gaining 6%. But if the risk-free rate goes up to 5% and then you're getting a 6% premium on that, now you can be earning 11% on your private credit.