As regulatory changes have led to traditional lenders - such as banks - stepping away from lending to middle-sized enterprises, private credit managers have seized the opportunity to enter the market, lending to small and medium size enterprises that are non-investment grade. Target companies are often sourced from a credit manager’s proprietary network. The manager has the flexibility to set its preferred lending terms, typically arranging for protective covenants and collateral to protect against defaults. Returns are achieved by charging a floating rate spread above the reference rate, allowing the lender and investors to benefit from increasing interest rates. Unlike private equity, private credit agreements have a fixed term, meaning that the “exit strategy” for an investment is pre-defined.