Private credit has moved from a niche corner of finance to one of the most discussed alternative investments. The idea is straightforward: instead of buying a company’s shares or a bond traded on an exchange, investors lend money directly to borrowers outside the traditional banking system. This guide explains what private credit is, the main forms it takes and how UK investors can approach it.

What is private credit?

Private credit means lending that is arranged privately rather than through public bond markets or banks. The lender, often a specialist fund or an individual investor via a platform, agrees the terms directly with the borrower. In return the investor typically receives interest, and sometimes fees, over a fixed term, before the loan is repaid.

It has grown because many businesses and property developers want faster or more flexible funding than banks provide, while some investors want an income stream that is not tied to share prices.

The main types of private credit

  • Direct lending: loans to mid-sized companies, often secured on their assets and ranking ahead of shareholders.
  • Real estate lending: loans to developers or property owners, including development finance, bridging finance and the property bonds sold to individual investors.
  • Asset-backed lending: loans secured against specific assets such as equipment, receivables or infrastructure.
  • Mezzanine and junior debt: loans that rank below senior lenders, which pay more to compensate for higher risk.
  • Specialist and venture lending: loans to younger companies, usually riskier and priced accordingly.

How it differs from bonds and bank deposits

A government or large corporate bond trades daily and its price is visible. A private loan generally does not trade, so you cannot easily sell it, and its value is estimated rather than quoted. Bank deposits are covered by the Financial Services Compensation Scheme up to a limit, whereas private credit is not. The payoff for those differences is meant to be a higher rate of interest, but a higher rate is the market’s way of pricing greater risk, not a bonus.

How UK investors can access it

  • Listed credit funds and trusts: shares in investment companies that lend privately. They can be bought on an exchange, but prices can differ from the value of the loans.
  • Unlisted funds: pooled funds with higher minimums and lock-ups, usually for professional, high net worth or sophisticated investors.
  • Peer-to-peer and lending platforms: individual loans or diversified pools, with varying regulation.
  • Bonds and loan notes: including property bonds, which are loans to property companies and are generally limited to certified investors.

Where a route is limited to certain investors, you will usually be asked to self-certify; see our guides to sophisticated investors and high net worth investors.

The risks to understand

  • Default risk: the borrower may not repay in full or on time.
  • Illiquidity: you may be unable to access your money until the loan ends, and sometimes not even then.
  • Valuation risk: loan values are estimates, and may not reflect what a sale would achieve.
  • Concentration: a few large loans can dominate a fund’s results.
  • Leverage and structure: some funds borrow, which can amplify losses.
  • Interest rate and economic cycle: defaults tend to rise in downturns, when you may most want access to cash.
  • Regulation: many routes sit outside the FSCS and some outside FCA authorisation.

What to check before investing

  • Who the borrowers are and how they will repay.
  • Whether loans are secured, on what, and ranking behind whom.
  • The full fee structure, including management and performance fees.
  • How and when you can withdraw, and whether withdrawals can be suspended.
  • The manager’s track record through a downturn, not just in good times.
  • The regulatory status of the promoter on the FCA Register.

Where it fits

For investors who understand the risks, private credit can complement shares and traditional bonds, but it is not a replacement for a cash reserve. To see how it compares with other options, read our guides to fixed income investments in the UK and alternative investment options. When you are ready, compare private credit and fixed-term opportunities matched to your investment level and eligibility.

This article is general information only and does not constitute financial advice. Private credit is high risk, often illiquid and usually not covered by the FSCS; you could lose some or all of the money you invest. Seek independent advice from an FCA-authorised financial adviser if you are unsure.