RWA Academy: Private Credit is not a Monolith

Real-World Assets are becoming a lasting part of onchain finance. At Plume we want everyone to understand this new ecosystem, built with traditional assets. The RWA Academy breaks down everything you need to know, from the most basic explanations to more detailed financial concepts. Here, we explain what private credit is as an asset class.

While lending has been around for centuries, private credit as we know it has existed for decades as a way for businesses to borrow directly from non-bank lenders. The first BDCs were incorporated in the 1980s, with many proclaiming the post-COVID era of 2022-2025 the Golden Age of Private Credit. Today, it has become one of the most significant real-world asset categories moving onchain, and likely the second-largest, after treasuries.

But to understand how private credit delivers real-world yield onchain, we first need to understand the underlying asset.

What is Private Credit?

When a business wants to grow, it needs capital. Not every company wants to (or is able to) borrow from a bank, and not every company can issue public bonds. Banks tend to move slowly and impose more rigid underwriting requirements. Public markets may not be accessible. Sometimes, banks simply can’t syndicate enough debt for Private Equity LBOs or massive GPU hyperscalers. On the flip side, as American banking institutions consolidated rapidly in the 1980s, traditional bank financing shifted toward large-cap deals, leaving fewer options for smaller borrowers.

So businesses turn to private lenders instead.

Private credit refers to direct lending provided by private funds, asset managers, or specialized lenders outside the traditional banking system. A lender provides capital. A company agrees to repay that capital, plus interest, over a defined period. In theory, a simpler and more flexible process for borrowing money.

Over the past decade, private credit has grown into a major segment of global capital markets. It offers borrowers speed and flexibility.

For investors, it provides access to structured income tied to real operating businesses. In an investment class of its own, private credit gives investors the option to invest in a categorically safer, more predictable security (credit) - similar to high-yield bonds - rather than equity.

Why Do Investors Allocate to Private Credit?

Investors are drawn to private credit primarily for stable income backed by cash flows, rather than a company’s equity or asset base.

Yield in private credit exists because businesses are willing to pay a premium for flexible, available capital. Private lenders can structure loans around specific needs, move quickly, and finance companies that may not fit conventional lending criteria. In exchange, borrowers pay higher interest rates.

That interest becomes the investor’s return.

Unlike equity investments, where returns depend on valuation growth, private credit income is typically generated through signed loan agreements, enforceable repayment schedules, and real businesses generating revenue. On the other hand, in a downside scenario, debt is always senior to equity, meaning that in a bankruptcy proceeding or any drawdown, the debt is repaid first.

So, debt is both more stable and safer than equity. You may know equity investors as Venture Capital, Growth Equity, Private Equity, or even Hedge Funds (trading public equities). These investors all benefit from (and suffer from) equity appreciation or depreciation. Credit income is based on a fixed or floating coupon, with its downside capped until principal loss (companies can’t repay the loan) and upside similarly capped (income is never above the interest rate)

Private credit also behaves differently from publicly traded assets. These loans are not traded continuously in open markets, so they do not experience the same day-to-day price volatility as equities or public bonds. Valuations tend to reflect borrower performance rather than short-term market sentiment, and mark-to-market valuations (valuation updates to private credit holdings) are done much more infrequently and in private.

Risk still exists, particularly borrower default risk and macroeconomic stress. Valuation drawdowns can also be delayed through private, less transparent updates, but returns are contractual and tied to measurable repayment obligations. Things to watch out for include the borrower's creditworthiness, sector and/or geographic concentration of the loans, and the borrowers' general business performance. Put simply, how likely are these borrowers to repay their loans, or are they at risk for default?

As a rule of thumb, the higher the yield, the riskier the loans. Before the “Golden Age” of private credit, senior lending facilities rarely generated double-digit APYs. Be wary of anything offering too high an APY. Conversely, if something looks risky, the yield should be commensurate with the risk profile.

For many investors, this makes private credit an income-oriented allocation rather than a growth-driven one.

Debt, Equity, and Everything In Between

Within private credit, there are different variations of risk, reward, and security. Think of debt and equity as a spectrum: equity is the riskiest, senior-secured debt is the safest. However, there are multiple tranches that sit between them.

Tranches are similar to floors in a building. In a flood, the ground floor is the first floor to go underwater. As the flood continues and the water rises, the second floor goes underwater. Then the third floor, and so on, until the entire building is underwater.

This is representative of any company or borrower. In a full bankruptcy scenario, similar to a home foreclosure, a company's assets are sold to repay its stakeholders. All proceeds recouped in bankruptcy are paid to stakeholders top-down: Senior, then Junior, then Equity (loosely speaking). And so, just like a flooded building, it’s the bottom floors (equity) that get flooded (go underwater) first, meaning the higher floors are protected (above water) until those lower tranches are all consumed. Senior debt is protected until all junior debt is wiped out.

So what types of debt sit above equity?

• Senior-secured, first-lien: typically, this is the most senior and safest form of debt. Senior means it sits at the top, secured means it’s secured by something - equipment, real estate, receivables. Also considered “first-lien” debt

• Senior-secured, second-lien: still senior-secured debt, but the lien or securing of the debt is defined as junior to senior secured first-lien debt

• Senior debt: still the most senior type of debt, but unsecured by anything. This means it is still one of the first loans paid back in a bankruptcy, but there is no specific collateral or asset pledged to back this debt

• Junior or Subordinated Debt: riskier debt that sits below all the senior debt, next to get paid out in a bankruptcy proceeding, but still above equity

• Mezzanine: like a mezzanine floor in a building, mezzanine sits between debt and equity. It’s the most subordinated form of debt, last to get paid out of all debt tranches. To make up for the risk, it carries equity-like characteristics that give it equity-like upside. This can include convertible notes (debt that converts to equity), PIK interest (interest paid in the form of accruing equity), and warrants (contractual rights to purchase equity)

So as you can see, even within “private credit,” there are multitudes of flavors of debt across all the tranches between debt and equity. Private credit simply refers to non-bank syndicated loans. Banks can also offer all these forms of debt, from senior-secured to mezzanine. We can write an entire article, deep diving into the nuances of each form of debt.

While private credit is thrown around a lot within RWAs, it’s important to understand what exactly it is you are investing in. Some funds exclusively lend senior-secured loans, others exclusively lend mezzanine, while even more will lend a diversified mix. Private credit is not a monolithic asset class and actually says nothing about the debt other than the fact that it’s privately-traded, non-bank debt.

Why Bring Private Credit Onchain?

Tokenizing private credit does not change the underlying loan agreements. The businesses still borrow. The repayment schedules still exist. The interest still drives yield.

What changes is the distribution.

Bringing private credit onchain can expand access beyond traditional private equity channels, reduce minimum investment sizes, improve transparency around fund structures, and allow integration into broader digital financial systems. Instead of accessing private credit through closed, relationship-driven networks, investors can gain exposure through tokenized fund shares issued by regulated asset managers.

The asset remains structured lending. The innovation is in how that exposure moves and integrates.

Where Private Credit Fits in the RWA Landscape

Within crypto, private credit fits neatly into a very familiar asset category: yield. Earn programs abound, with millions of users participating in “yield farming,” protocol emissions, yield-bearing stablecoins, and more. Private credit brings contractual, income-generating exposure into the RWA ecosystem, well-suited for many familiar applications.

Unlike growth-driven assets, its returns are rooted in structured lending agreements and real business activity. Onchain, this introduces a more income-focused building block for digital portfolios.

It is not a new asset class. It is a new distribution model for an established one.‍

Plume Services are not available to U.S. persons or residents. Crypto trading involves high risk, including potential loss of all principal. Past performance is not indicative of future results. There are no guarantees of profits, returns, or yields. Information is for educational purposes only—we make no representations or warranties on its accuracy, completeness, suitability, or value. This is not financial advice; consult professionals.