Much has been said about private credit. Since the pandemic it’s been the part of the financial services industry that everyone wants to work in, based on growth of around 50% since 2020 – from $2tn to $3tn – according to Morgan Stanley.
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Private credit owes its expansion to the restrictions on lending by banks. After Basel III, banks faced significant restrictions on capital and liquidity. Many banks found it simpler to discard riskier and illiquid loans to maintain their benchmarks, but those loans were still a ripe target market for an investor with the right approach to risk and/or liquidity.
Unlike private equity, the private part of private credit doesn’t come from the customer/target company. It comes from the credit firm itself, which lends private capital to both private and public companies.
Private credit is a rapidly growing industry, even now. From $40bn in assets under management (AuM) in 2000, it had almost $2tn in late 2025, according to HSBC, which also forecast that it could reach $4.5tn in AuM by 2030. The sky is the limit for private credit – or, at the very least, the $141tn global fixed income market is the limit.
So, how does it all work? A Morgan Stanley report from October last year noted that there are five “types” of private credit: direct lending, mezzanine capital, distressed debt, special situations, and asset-backed finance.
What is direct lending?
Direct lending is what most people think of when they hear about private credit. In a nutshell, it’s a non-bank institution (the private credit firm) making a loan to another company.
It’s an alternative to that company going through a bank’s debt capital markets team to issue a tradable public debt, and it’s an option usually taken by a company that would have otherwise only qualified to be “non-investment grade”, in Morgan Stanley’s words. In other words – it’s often a loan taken by companies that wouldn’t get a good deal on the public markets due to their poor record.
Direct lending jobs are pretty similar to ones in leveraged finance – analysing EBITDA and leverage ratios to determine the price/quality of a loan. The main difference being that, instead of pitching it to investors (in a syndicate), a direct lending professional is pitching it to their investment committee.
What is mezzanine capital?
Mezzanine capital is a long-term loan arrangement with a special privilege – in the event of a company going into bankruptcy, it is one of the first loans to be paid off. It is often also convertible into equity.
The fact that mezzanine capital is convertible into equity means that the job is pretty familiar to any banker that’s worked on convertible bonds.
What is distressed debt?
Distressed debt lending is given to companies in financial distress, with the aim to restructure their balance sheet. As one may expect, this sort of activity is more common during economic downturns and what Morgan Stanley calls “periods of credit tightness”. As you might expect, lending to companies on the brink of financial failure is high risk and high reward.
Distressed debt lending is a place for the restructuring bankers of the world. The depth of analysis needed – as well as the typical target market – means that these have some significant overlap. Fintech CAIS notes that “Distressed funds have been formed to buy this debt, take borrowing companies through a capital restructuring.”
Naturally, distressed debt also requires lawyers. Firms teetering (or totally) over the edge of bankruptcy, especially financial services firms, have complex hierarchies of debt repayment that require bulletproof legal knowledge to maximise value extraction.
What is special situations?
This is essentially lending to a company that is in a pickle. It doesn’t have to be a bad pickle – it’s not distressed debt – but it is a pickle requiring bespoke credit arrangements. The examples that Morgan Stanley gives are companies actively amid an M&A transaction, divesture, or spin-off driving their borrowing needs.
Special situations lending is something that banks have dabbled in historically. At Goldman Sachs, this business was run by Julian Salisbury at one point (he moved on to running the merchant bank after that). Salisbury moved to private investment firm Sixth Street in 2024. Nowadays, mostly hedge funds are involved in special situations investing – and they tend to hire credit analysts (or traders) for the role.
The work of restructuring professionals also overlaps with special situations, too. Boutique bank PJT Partners, for example, lumps the two into the same team.
What is asset-backed finance?
Asset backed finance is a lending arrangement based on specific future revenues. That can mean a specific loan to buy a piece of real estate, a plane, or even a pool of financial assets such as student loans.
Asset-backed finance is something that banks do pretty regularly in their “normal” activities – it’s a pretty standard corporate loan, in fact. Structured finance teams might feel more at home here than others, too, on account of their creative use of asset pools to create collateral for loans.
What is private credit’s outlook?
Private credit might have peaked. The Financial Times reported in January that private credit firms were selling their investments to themselves at “record rates” – around $15bn in credit continuation deals across 2025, up significantly from the $4bn across 2024.
It’s a bit of a worrying trend, and reminiscent of the ballooning secondaries market in private equity, which reached around $226bn in 2025. Boutique bank Evercore noted that it was a 41% increase on the year before.
There’s also the “SaaSpocalypse”. Earlier this year, there was a wave of defaults on private credit loans made to software companies, whose valuations were significantly (negatively) impacted by the emergence of AI. Private credit firms such as Blue Owl and Ares saw huge one-day drops in their share price – 9% and 13% respectively – as a result.
Still, investors are looking to put money into private credit. A separate Morgan Stanley paper last year said that 53% of institutional investors planned to increase their allocation to private credit, and only 1% planned to decrease their allocation in 2024. Just two years prior, those numbers were 48% and 7%, respectively.
What do private credit jobs pay?
Private credit pays well. Last year, a survey by finance influencer Litquidity showed that normal compensation – salaries and bonuses combined – at private credit firms ranged between $152k and $597k, depending on role and seniority. It was more or less on par with equivalent rank pay in private equity.
As anyone who knows will tell you, however, the real money in private capital is in carried interest. This is a pre-agreed percentage of a successfully exited deal that is paid to the professionals that worked on it. It exists in private credit, equity, and even venture capital.
Private credit carried interest is hefty. A recent survey from search firm Heidrick & Struggles found that the average principal working in a direct lending fund could expect to generate €2.4m ($2.9m) in carried interest for themselves across its five-ish years life cycle. A partner in direct lending generated about €3.2m ($3.8m), and a managing partner around €7.8m ($9.2m). All big sums of money – and all well below what their peers at a buyout (private equity) fund earned in their carry, on average.
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