Private Credit & Lending

What a private credit or peer-to-peer lending position actually is, how returns are made, how loans are priced, evaluating a specific opportunity, its risks, costs and taxes, and where it fits in a portfolio.

Being the bank, without being a bank

Lessons

• You are the lender, so you inherit the lender's worst day — Private credit means lending money outside public bond markets - to companies, property projects or individuals - usually directly or through a platform or fund, with no easy way to sell the loan. (9 min)
• Interest minus expected losses minus fees — A lending return is the interest collected, less the share of principal lost to defaults after recoveries, less fees. Expected loss is the number the headline rate leaves out. (12 min)
• A loan's rate is a stack: base rate, expected loss, illiquidity and fees — Private loans are priced by building up from a risk-free rate, adding compensation for defaults, for being unable to sell, and for the intermediary. Values between lending and repayment are mostly estimates. (11 min)
• Appraising one loan: what backs it, how thin the cushion is, and who collects — Evaluating a loan means asking how the borrower repays, what happens if they cannot, how far collateral could fall before you lose money, and how reliable the lender or platform is at recovery. (13 min)
• Defaults cluster, exits close, and interest is often taxed as income — The key risks are defaults rising together in a downturn, being unable to exit, and intermediary failure. Costs include layered fees, and interest is frequently taxed less favourably than gains. (12 min)
• Not a bond substitute - closer to high-yield credit you cannot sell — Private credit can add income to a large, diversified portfolio, but it behaves like risky credit in downturns and is illiquid, so it should be sized small and spread widely. (8 min)

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