What is Private Credit?

When most people think about lending money, they think about banks. You deposit your savings, the bank lends it to businesses, and you earn a bit of interest.

But here's something that might surprise you: banks aren't the only ones who can lend money. And increasingly, they're not even the main ones doing it for mid-sized businesses.

Private credit has quietly become one of the fastest-growing corners of the investment world. Globally, it's a $1.5 trillion market, expected to nearly double by 2028. In South Africa, it's filling gaps that banks have left behind.

If you've ever wondered where the interest on your fixed deposit actually comes from, or wished you could earn returns more like a bank does, this is worth understanding.

What is private credit?

Private credit is simply lending that happens outside the traditional banking system.

Instead of a bank providing a loan, a private lender does. This could be a specialised fund, an investment company, or increasingly, ordinary investors pooling their money together.

The borrower is typically a business. Maybe they need capital to buy equipment, expand operations, or bridge a gap in their cash flow. They approach a private lender, negotiate terms, and receive the funds. In return, they pay interest, just like they would on a bank loan.

As the investor, you're on the other side of that transaction. You provide the capital (through a fund or platform), and you receive a share of the interest payments. It's a bit like being the bank.

Here's a simple way to think about it:

The trade-off is straightforward: higher potential returns in exchange for higher risk and less liquidity.

Why do businesses borrow from private lenders instead of banks?

This is a fair question. If banks offer cheaper loans, why would a business pay more to borrow from a private lender?

There are a few good reasons:

Speed. Private lenders can close deals in two to four weeks. Bank loans often take 60 to 90 days, sometimes longer. If a business needs capital quickly, waiting months isn't an option.

Flexibility. Private lenders can structure loans to fit specific situations. Repayment schedules, interest rates, and covenants can all be negotiated. Banks tend to offer standardised products with less room for customisation.

Access. Many businesses simply don't qualify for bank loans. They might be too small, too new, or in an industry banks consider too risky. After the 2008 financial crisis, banks globally pulled back from lending to mid-market companies. Someone had to fill that gap.

In South Africa, this gap is pronounced. According to McKinsey research, lending to SMEs makes up only about 8% of the credit exposure of the banking sector, despite these businesses contributing 34% of economic output. Private credit has stepped in to serve the businesses that banks won't.

How do investors make money from private credit?

The returns come primarily from interest payments.

When a business borrows R10 million at 12% interest, they pay R1.2 million per year in interest. That money flows to the investors who provided the capital.

Some private credit investments also include:

• Origination fees — a one-time fee charged when the loan is made

• Exit fees — a fee when the loan is repaid

• Equity participation — sometimes lenders get a small ownership stake in the business

The interest rates on private credit are typically higher than what you'd earn on a bank deposit or government bond. Rates of 10-15% or more are common, depending on the risk profile of the borrower.

Why so high? Because private credit serves borrowers who can't get bank financing. The lender is taking on more risk, and the higher interest rate compensates for that.

What makes private credit different from other investments?

Several things set it apart:

Regular income. Unlike shares, which may or may not pay dividends, private credit generates predictable interest payments. If you're looking for cashflow rather than capital growth, this matters.

Lower correlation to markets. Private credit doesn't move in lockstep with the stock market. When equities drop, your private credit investments aren't necessarily affected. This can smooth out the ups and downs of a portfolio.

Floating rates. Many private credit loans have floating interest rates, meaning they adjust when central bank rates change. When interest rates rise, your returns rise too. This is the opposite of fixed-rate bonds, which lose value when rates increase.

Illiquidity. This is the trade-off. Your money may be locked up for months or years. You can't just sell and withdraw like you can with shares or ETFs. Some newer platforms offer secondary markets where you can sell your position, but liquidity is never guaranteed.

What are the risks?

Private credit is not a savings account. I want to be clear about the risks.

Default risk. The borrower might not be able to repay. If a business fails, you could lose some or all of your investment. This is the primary risk.

Recovery risk. Even if a loan is secured against assets (equipment, property, inventory), recovering your money takes time and may not cover the full amount owed. Assets can be worth less than expected, especially in a forced sale.

Illiquidity risk. If you need your money back urgently, you may not be able to get it. Unlike shares, you can't just sell at the click of a button.

Manager risk. If you're investing through a fund, you're trusting the fund manager to pick good loans, structure them well, and manage defaults when they happen. Not all managers are equally skilled.

Concentration risk. Some private credit investments are concentrated in a single loan or a small number of loans. If one goes bad, it hits your returns hard.

The way to manage these risks is to understand what you're investing in. Is the loan secured against real assets? What's the borrower's track record? How diversified is the fund? What happens if things go wrong?

How is private credit secured?

Good private credit investments are typically "asset-backed", meaning the loan is secured against something valuable.

If the borrower can't repay, the lender can take ownership of the underlying assets and sell them to recover the money. These assets might include:

• Commercial property

• Equipment and machinery

• Vehicles and transport fleets

• Inventory

• Receivables (money owed to the business by its customers)

The value of this security depends on what the assets are and how easily they can be sold. A commercial building in Sandton is easier to sell than specialised mining equipment in a remote location.

When evaluating private credit, always ask: what secures this loan, and what would it be worth if things went wrong?

How big is the private credit market?

Globally, private credit has grown from almost nothing in 2000 to $1.5 trillion in 2024. Projections suggest it could reach $2.6-3 trillion by 2028-2029.

This growth accelerated after the 2008 financial crisis, when banks pulled back from lending to mid-market companies. Private credit stepped into the gap.

In Africa, private credit is still small but growing. According to research on private capital activity, only 0.3% of global private credit is deployed on the continent, and private credit makes up just 7% of financing in Africa. But deal values grew 14% year-on-year in 2024, and deal volume rose 23% in early 2025.

In South Africa specifically, the market is evolving. The South African Venture Capital Association (SAVCA) reported total private equity and debt funds under management of R237 billion at the end of 2023. And private credit is increasingly seen as a way to serve the mid-market businesses that banks have abandoned.

How can ordinary investors access private credit?

Historically, private credit was only available to institutions and wealthy individuals. Minimum investments were often R1 million or more.

That's changing.

Tokenised private credit is one route. Platforms like Mesh.trade, VALR, and Luno are beginning to offer tokenised debt instruments that give retail investors access with lower minimums. We covered this in our article on tokenisation.

Some funds are also lowering their minimums or creating structures specifically for retail investors.

The key is to understand what you're buying. Is the investment diversified across many loans, or concentrated in a few? What assets secure the loans? What's the track record of the manager? How do you get your money back if you need it?

Who is private credit right for?

Private credit makes sense for investors who:

• Want regular income rather than capital growth

• Are comfortable locking up their money for a period

• Want to diversify beyond shares and bonds

• Understand the risks of lending to businesses

• Can afford to lose some or all of their investment if things go wrong

It's probably not right for:

• Anyone who might need their money back at short notice

• Investors who don't understand or aren't comfortable with credit risk

• People looking for quick gains or high volatility

Private credit is a tool, not a magic solution. It can be a valuable part of a portfolio, but it shouldn't be your only investment.

The bottom line

Private credit is lending to businesses outside the traditional banking system. You provide capital, businesses pay interest, and you earn returns that are typically higher than bank deposits or bonds.

The trade-off is risk. Borrowers can default. Your money can be locked up. Things can go wrong.

But for investors who understand these risks and want predictable income from real economic activity, private credit offers something different from the volatility of the stock market or the low returns of a savings account.

It's been one of the fastest-growing asset classes globally over the past decade. And in South Africa, where banks have stepped back from lending to mid-market businesses, that gap is creating real opportunities for investors willing to understand the space.