Introduction
The credit facilities available from traditional banks, characterised by high interest rates and rigid loan terms, have increasingly become unsuited to the peculiar demands of modern businesses. Private credit provides a modified alternative to the traditional lending system, offering a more flexible, bespoke credit facility to non-bank deserving entities. Private credit essentially refers to direct lending by non-bank lenders, typically to small and mid-sized businesses, where the loans are not issued or traded on the public market.
Thus, the role of private credit is not to replace the existing credit framework within traditional banking structures; rather, it is to serve the segment of the economy that is beyond the reach of typical credit facilities, thereby playing a complementary role and expanding the frontiers of the economy. Private credit can be structured in different ways, depending on the needs of the lender and investor. Private credit arrangements should be governed by carefully drafted agreements that clearly set out key commercial and legal terms, including pricing, tenor, repayment mechanics, and events of default.
In this paper, we shall explore the concept of private credit and its impact on the economies of the world and conduct a comparative analysis of its role in developed and emerging markets, with particular emphasis on regulatory frameworks, access to capital, risk allocation, and its implications for economic growth.
Strategies of Private Credit
Although private credit encompasses a range of lending strategies, this analysis shall focus mainly on three core strategies which capture the primary risks and returns associated with each class:
1. Direct Lending: Direct lending is one of the more common strategies of private credit. It involves non-bank lenders providing loans directly to private companies, usually middle-market and non-investment-grade firms, without particularly involving the traditional intermediaries such as banks. These loans are structured in a bilateral form between the lender and borrower, allowing parties to determine the covenants and terms in line with the borrower’s financial projections for repayment.
2. Mezzanine Financing: Mezzanine Financing is a hybrid funding structure that combines elements of both debt and equity. Under this model, lenders provide capital to a business and assume higher risk by obtaining equity participation, typically through conversion rights, warrants, or similar instruments. As a result, the financier functions as both a creditor and an investor in the company. This form of private credit is commonly used to support growth initiatives such as business expansion, acquisition or recapitalisation. Although mezzanine financing is structured as debt, its contractual features may allow for conversion into equity or equity-linked instruments, thereby aligning the lender’s returns with the company’s long-term performance.
3. Distressed Debt: This is a form of lending which targets borrowers who are insolvent or in business distress. These borrowers are typically excluded from access to traditional banks due to their current solvency status and must turn to private credit sources. The attraction for the lender is the borrower’s lower bargaining power, which allows the lender to negotiate higher returns, contractual protections, and, in some cases, potential control rights.
Given the bespoke nature of private credit, comprehensive covenants, representations and warranties are critical to managing information asymmetry and credit risk. Furthermore, private credit agreements should incorporate clear dispute resolution mechanisms, including jurisdiction clauses, governing law provisions, and, where appropriate, arbitration frameworks. Careful attention must also be given to enforcement mechanisms, particularly in cross-border transactions, to ensure that remedies are practical rather than merely theoretical.
Sources of Private Credit
Private credit lenders are typically non-traditional banking sources. Institutional investors are the main source of capital for private credit funds. An institutional investor is an entity such as a hedge fund, mutual fund, pension fund, or insurance company that has access to large funds for long-term investments and low liquidity needs. These are the most common sources of private credit, as they have the resources required to explore a variety of investment opportunities. Other sources of private credit include specialised funds, high-net-worth investors who serve as alternative lending channels and private equity firms.
Comparative Analysis: The United States
Across the globe, private credit is being deployed to support national growth. Some jurisdictions, however, have fared better than others in this regard, with the United States accounting for $1.1 trillion of the $1.6 trillion in private credit funding globally. In 2024 alone, private credit contributed to an estimated 2.5 million jobs in the United States (U.S), generating approximately $217 billion in wages and benefits and $370 billion in GDP. This reflects that a deliberate approach to the utilisation of private credit by the relevant stakeholders can yield dividends not merely for investors but for the nation at large. The key to the success of the private credit facility in the U.S. lies in the recognition of its value by the target audience and the offering of the said value by institutional investors and high-net-worth individuals (comprising mainly pension funds, insurers or sovereign wealth funds).
In this regard, a survey of approximately 70% of U.S private credit providers conducted in 2021 revealed that most companies relied on private credit as “they were too small for bank syndication.” <Joren Young Soo Jang et al, “A Survey of Private Debt Funds,” (2023) NBER Working Paper No. 30868 >. The survey also revealed that most companies opt for private credit due to key advantages it possesses over the traditional lending system, including flexible covenants (77%), certainty and speed (91%), as well as a stable relationship with a lender holding the loan until maturity of the same (65%). The credit facility obtained under this framework serves as working capital for these companies, providing sustained liquidity for business operations and employee wages, thereby increasing bargaining power and ultimately tax revenue for the government.
The African Position
There exists a conspicuous gap in the credit needs for African mid-sized companies. The majority of companies in Africa are Small and medium-sized enterprises (SMEs), which play an invaluable role in the continent’s overall economic development. However, these companies often lack access to the capital needed for growth. For instance, the global private credit market received inflows of $1.7 billion at the end of 2023, with a measly 0.3% of that amount going to the African market. Additionally, the World Bank reported that credit-to-GDP ratios in Sub-Saharan Africa remain low relative to those in high-income Countries. This underscores the need for a more developed private debt market to help address current deficits in the African economy.
The financial need in this regard becomes more evident as lending countries, which hitherto funded some private-sector needs, now turn inward to address their own domestic issues, thereby cutting off aid and loans that were previously deployed to African economies.
The Nigerian Position
SMEs are a critical aspect of the Nigerian economy, contributing about 48% of GDP and accounting for 84% of the workforce. Any comprehensive plan to grow the economy must thus include a sufficient roadmap to harness the economic potential inherent in SMEs and other entities typically not within the reach of traditional bank credit facilities. Thus, a structured approach to financing through private credit is required in this regard. The large-scale adoption of private credit would provide much-needed growth capital for mid-sized businesses, thereby creating more employment opportunities, which in turn would lead to increased taxation and overall economic development.
The Securities and Exchange Commission Rules on Issuance and Allotment of Private Companies’ Securities
Private credit is generally structured through privately negotiated lending arrangements. Nevertheless, recent regulatory developments have expanded the range of instruments through which private credit may be deployed in Nigeria. In particular, the Securities and Exchange Commission’s 2025 Rules introduced a regulatory framework allowing private companies to issue debt securities to qualified investors. Although these instruments constitute securities rather than loan facilities, the framework provides an additional, regulated channel through which private capital may be extended to private companies.
Private companies issuing securities under these rules are subject to certain restrictions on the issuance of securities. The rules restrict private companies from offering shares to the public and provide that the debt securities issued pursuant to these rules shall be sold only to qualified investors. A qualified investor under the rules is an institutional investor or a high-net-worth investor.
Recommendations
- Parties participating in private credit transactions should ensure that all financing arrangements are documented through robust, well-structured contracts. Given the bespoke and often complex nature of private credit instruments, clear contractual allocation of rights, obligations, risk, and remedies is essential to protect the interests of both lenders and borrowers. Proper legal structuring also ensures regulatory compliance, enforceability of security and covenants, and effective dispute resolution, thereby reducing execution risk and promoting confidence in private credit as a sustainable financing option.
- While private credit providers play a significant role in expanding access to alternative financing, the broader macroeconomic framework also plays an important enabling role. In this context, business-friendly monetary policies that promote price stability and investor confidence help sustain an attractive climate for local and international institutional investors, as well as high-net-worth individuals, to deploy capital into private credit facilities for mid-sized businesses. Such stability supports both lending capacity and borrowers’ ability to meet their debt obligations over the financing tenor.
Conclusion
Private credit has emerged as a critical component of modern financing ecosystems, particularly in environments where traditional bank lending is constrained by regulatory capital requirements and risk aversion. By offering flexible, bespoke funding structures, private credit fills a financing gap for businesses seeking growth capital, acquisition funding, or balance-sheet optimisation.
As capital markets evolve and demand for non-bank financing continues to rise, private credit is likely to play an increasingly prominent role in supporting enterprise growth and economic development, particularly in emerging markets. Its sustainability will ultimately depend on robust regulatory oversight, sound risk management, and transparency, ensuring that private credit remains a viable and responsible complement to traditional finance rather than a substitute for prudent lending practices.
Authored By
- Eunice Alasa, Partner, Banking, Finance & Capital Markets
- Sonia Onyia, Associate, Banking, Finance & Capital Markets
KENNA is a full-service law firm with a client-first approach, delivering bespoke legal solutions across diverse sectors, both locally and internationally.
