16.9.2024

Private credit – an alternative to bank financing

Related services

In recent years the global loan market has seen a shift from traditional bank lending towards private credit. Private credit has also gained increasing popularity in Finland, where corporate finance has traditionally been based on relationship banking.

What is private credit, and why has it become so popular?

Also known as direct lending, private credit is financing provided directly to a company by a non-bank lender such as a private credit fund.

Economic uncertainty and increased regulatory requirements have led banks to become more risk-averse and traditional bank financing has become more difficult for some companies to obtain. This has resulted in an increased demand for alternative sources of financing, allowing providers of private credit to gain market share from banks.

How does private credit differ from a bank loan?

Private credit is usually provided directly to the borrower by a single lender, although we have recently seen private credit provided by small clubs of lenders as well. Private credit loans are in many ways like traditional bank loans in terms of maturity, pricing and documentation.

Similarly to bank loans, more and more private credit loans incorporate features like sustainability-linked pricing. The investor demand for more sustainable and greener financing can also be seen in the private credit market. This will direct the flow of funds in the future more often to companies which support the green transition.

What sets private credit apart is the flexibility that it can offer to the borrower. As private credit providers are not bound by stringent capital and other regulatory requirements, they can often provide borrowers with more flexible terms than banks can, such as higher leverage and a larger portion of bullet repayments or balloon repayments. This allows companies to take advantage of investment and growth opportunities which may not otherwise be possible. Because of this flexibility, private credit has been an attractive option for example for borrowers with lower credit ratings, which may not be able to secure traditional bank financing on commercially viable terms and are unable to issue bonds.

Pros and cons of private credit

As with any type of financing, private credit has its own advantages and disadvantages that borrowers should consider when evaluating their funding options.

Pros

  1. Flexibility: Private credit often means more flexible terms for the borrower and a somewhat smoother negotiation process. As the borrower generally deals with a single lender, getting consent and modifying financing terms tend to be simpler.
  2. Access to expertise: Unlike banks, private credit providers often have the capacity to support the borrower’s business by providing access to their own business expertise. This can be particularly beneficial for a borrower seeking growth in a challenging economy.
  3. Confidentiality: The limited number of parties involved in each private credit deal ensures that the terms remain confidential.

Cons

  1. Higher cost, more restrictions: Private credit tends to be more expensive and comes with stricter lender protections than bank loans due to the typically higher risk profile of borrowers who opt for private credit.
  2. Lack of banking relationship: In certain cases, the lack of a banking relationship may be an issue as private credit funds are not able to provide access to other banking services that companies need. Moreover, while there is no record of this happening in reality, it has been suggested that a private credit fund might adopt a harsher stance on enforcement if the borrower defaults on the loan.
  3. Lack of visibility: Although confidentiality is a great bonus for both the borrower and the lender, the lack of access to data makes it more difficult for market participants to track deal volumes and market trends.

The future of private credit

While bank lending is expected to become more attractive to borrowers as interest rates fall, it is still likely that there will be a demand for private credit. It is even believed that the market share of private credit in corporate lending will continue to grow.

The benefits of private credit remain attractive to borrowers, and the availability of private credit is expected to increase as investors continue to invest in private credit funds in pursuit of strong returns. An increase in supply is likely to result in tougher competition between private credit providers, which may lead to lower pricing and terms more favourable to borrowers overall.  

Latest references

We advised OP Corporate Bank plc in a real estate financing arrangement relating to DHL Express logistics centre under construction near Helsinki Airport. In the arrangement Nrep (acting on behalf of NSF III Fund) and Pontos Group acquired Finavia’s stake of DHL Express logistics centre under construction. LEED Platinum certification will be applied for the project, and as a result of the certification, the facility is contemplated to qualify as a green loan after the construction completion date.
Case published 12.3.2025
We advised Gasum in chartering a new LNG and bio-LNG bunker vessel. The vessel called Celsius will serve Gasum’s customers starting 2027. The investment is part of Gasum’s strategy to secure the availability of LNG and bio-LNG to its customers in the Northwestern European area as demand increases in the coming years. Gasum is a Nordic gas sector and energy market expert. Gasum offers cleaner energy and energy market expert services for industry and for combined heat and power production as well as cleaner fuel solutions for road and maritime transport. The company helps its customers to reduce their own carbon footprint as well as that of their customers. Sirius is a Swedish shipping company founded by the Backman family. Sirius operates 11 product/chemical tankers and 2 LNG tankers and has a further 3 product/chemical tankers under commercial management.
Case published 11.3.2025
We advised Neste as it signed a EUR 200 million bilateral green term loan agreement with Skandinaviska Enskilda Banken AB (publ). The proceeds of the loan will be used to finance eligible assets and projects in accordance with Neste’s Green Finance Framework. The loan has a tenor of five years. Neste published a renewed Green Finance Framework in February 2024 to align future financing activities with market best practices and standards. In addition to renewable and circular solutions, Neste’s renewed framework includes renewable energy as an investment category. Longer term actions on Neste’s climate roadmap include scaling up new technologies and innovations, with focus on renewable hydrogen. Renewable hydrogen and other new technologies are estimated to have a reduction potential of 20% or more of the 2019 scope 1 and 2 emission baseline by 2030.
Case published 21.2.2025
We advised a financier consortium including OP Corporate Bank plc, Nordea Bank Abp, and Skandinaviska Enskilda Banken AB in a leveraged financing arrangement for Vexve, a company owned by DevCo Partners Oy. The financing included EUR 143 million acquisition, refinancing and other facilities for, among other things, the financing of Vexve’s acquisition of Denmark-based Frese A/S, a leading manufacturer of dynamic balancing valves for hydronic networks. Vexve’s combined turnover after the completion of the transaction will be ca. EUR 200 million. Vexve is the leading European provider of valve solutions for the energy sector and selected energy-intensive industries.
Case published 7.2.2025