Private credit, the new order in lending

Private credit explained, and why borrowers choose it

Weng Fai: Many of our readers in Malaysia may not be familiar with private credit. In simpler terms, what is private credit? What does a private lender like your firm do, and who are the typical borrowers? 

Chwee Sing: Put simply, private credit refers to non-bank lending that sits outside the public markets. Instead of raising capital through bonds or relying solely on traditional bank loans, companies borrow through privately negotiated financing structures—typically from private credit funds. 

Increasingly, some of these transactions are also originated or arranged by banks and then distributed to private credit funds, or in certain cases partially retained on bank balance sheets.

This evolution means that private credit isn’t defined solely by who originates or ultimately holds the loan, but by the nature of the transaction itself—bespoke, privately negotiated, and outside the public markets.

Over time, the definition of private credit has broadened significantly. Historically, it focused mainly on loans to corporates or their shareholders and sponsors—what we commonly refer to as direct lending. Today, private credit also includes real estate private debt, infrastructure debt, asset-based lending, and specialty finance. What these segments share is the ability to structure capital around specific assets, cash flows, or situations, rather than relying on standardised products.

In direct lending specifically, private credit provides tailored financing for companies or their shareholders seeking capital for growth, acquisitions, refinancing, working capital, or more complex or time-sensitive situations. Borrowers are often drawn to private credit because it offers speed, certainty of execution, and flexibility that traditional channels may not always be able to provide.

Typical borrowers range from financial sponsor-backed companies to family-owned or founder-led businesses with strong and visible cash flows, as well as asset-heavy businesses that can support asset-backed structures. Globally, financial sponsor-backed companies account for roughly 70–80% of direct lending activity, and around 75–85% of the market remains focused on performing credit, with the balance in special situations and distressed strategies.

A private lender like us is involved throughout the full lifecycle of an investment. We underwrite the business and, importantly, the downside; structure the loan across tenor, pricing, covenants, and security; fund the investment from capital we manage; and actively monitor performance over the life of the loan. The objective is to deliver predictable, risk-adjusted returns for investors, while providing borrowers with financing that is genuinely fit for purpose.

Weng Fai: You’ve noted that private credit is typically more tailored and offers greater speed. Tell us more about that. From the borrower and investor perspective, what drives them to turn to private credit over other sources of capital?

Chwee Sing: Private credit can be structured around a borrower’s repayment capacity rather than rigid templates—particularly in growth, transition, or non-standard situations. That may include limited or no amortisation, the ability to capitalise interest or use payment-in-kind (PIK) structures, and longer tenors. It can also be more flexible on credit requirements. For example, relying on future cash flows or profitability rather than historical performance, accepting higher leverage, or operating without hard asset security. Importantly, private credit can accommodate complex situations and structures that would not typically fit within vanilla bank lending frameworks.

Borrowers turn to private credit for speed, certainty, tailored flexibility, and confidentiality. Investors are paid the illiquidity and risk premium, get robust contractual cash flows, and the ability to negotiate downside protection through structure, covenants, and governance.

Weng Fai: How do you position yourself vis-à-vis banks in the ecosystem?

Chwee Sing: I very much see private credit as complementary to banks rather than competitive. Banks remain essential providers of capital, particularly for working capital facilities, trade finance, and lower-risk exposures.

Private credit tends to step in where banks may be constrained—whether by tenor, collateral profile, leverage, complexity, or timing. In many cases, private credit provides a bridge, allowing a company to stabilise, execute a business plan or navigate a transition, and ultimately refinance back into the banking system when it is ready.

Weng Fai: Building on that, walk us through the lifecycle of a typical private credit deal, from first conversation to exit—the key steps, speed, and value-add. 

Chwee Sing: A typical private credit deal starts with an initial conversation focused on understanding the business and the situation. We align early on the use of proceeds, timeline, and the borrower’s key requirements such as size, currency, repayments profile, covenant flexibility, and security package.

We then move into a preliminary credit assessment. This involves reviewing financials and business fundamentals, understanding operating and earnings drivers, assessing management quality and asset values, and stress-testing cash flows. A key focus at this stage is identifying what could go wrong and how the downside is protected.

If the opportunity makes sense, we issue a term sheet setting out the proposed structure—facility size, pricing, tenor, covenants, and security. Once terms are agreed, we move into confirmatory due diligence and documentation, often running those workstreams in parallel to maintain speed and certainty of execution. When those processes are completed, the transaction is funded.

Post-funding is where a lot of the value-add sits. We actively monitor performance, stay close to management, and engage early if conditions change. If funding needs evolve or performance comes under pressure, we work constructively with the borrower to adjust structures or agree on solutions.

Exit is typically achieved through scheduled amortisation from cash flow, refinancing—often back into the banking system or capital markets as the company matures—or repayment following a corporate transaction such as a sale. 

Alan Foo: Having mapped the deal lifecycle, how does that discipline translate as AI, climate imperatives, and geopolitics reshape industries and open new areas of growth, as our recent research has shown? Globally, private credit investors are already deploying into areas such as data centres and energy transition. When you look at these emerging industries, how do you underwrite them, and what are the key signals that give you conviction?

Chwee Sing: When I look at emerging areas like data centres and energy transition, I am a credit investor first. I’m not trying to underwrite technological breakthroughs or policy outcomes. I’m underwriting cash flows, downside protection, and resilience through cycles.

The first thing I focus on is where the risk really sits in the value chain. When it comes to data centres, for example, I’m far more comfortable lending against assets or platforms that are already embedded in customer ecosystems, with long-term contracts, strong counterparties, and high switching costs, rather than early-stage technology or unproven demand.

Second, I place a lot of emphasis on contracted or quasi-contracted revenue. In emerging sectors, visibility matters even more. Long-dated offtake agreements, take-or-pay contracts, regulated returns, or inflation-linked pricing help turn what might look like a growth story into something that behaves more like infrastructure-style credit.

Third, I stress-test for non-financial risks, particularly regulation, energy pricing, geopolitics, and policy stability. In the energy transition, for instance, I ask whether the economics still work if subsidies are reduced, power prices move materially, or permitting timelines slip. I want to be comfortable that the business survives even if the world doesn’t play out exactly as forecast.

In terms of conviction signals, a key one for me is who else is committing capital alongside me. Most of all, I look for strong sponsors, strategic partners, or investment-grade customers with real skin in the game. I also look closely at whether the asset is mission-critical to customers, as that tends to support pricing power and credit quality through downturns. 

Finally, I structure for uncertainty. In newer sectors, I typically lean on conservative leverage, robust covenants, strong security packages, and structural protections, so that even if the growth thesis takes longer to materialise, I remain well protected as a lender.

At the same time, these structural shifts can disrupt existing businesses. Entire industries may be reshaped or become obsolete, and companies that fail to adapt to new technologies or competitive dynamics can fall behind quickly. As part of my underwriting, I constantly ask how exposed a business is to disruption—and whether it has the ability and willingness to adapt.

How private credit has leapt into mainstream

Alan Foo: Globally, the private credit market has grown rapidly since the 2008 Global Financial Crisis (GFC), with record fundraising and strong returns. Beyond the deal-level advantages you’ve described for borrowers and investors alike, what structural shifts since the GFC have really driven its popularity? 

Chwee Sing: Since the GFC, on the supply side, banks have faced tighter capital and regulatory constraints, which has reduced their appetite for holding leveraged or illiquid loans. Private credit has stepped in to fill that gap. This dynamic has been particularly pronounced in the US and Europe, where a significant portion of leveraged lending has migrated from bank balance sheets to private credit. In much of Asia, however, this has been less of a driver, as banks have generally maintained, and in some cases, increased, their lending appetite.

On the demand side, institutional investors have been searching for stable income, diversification, and lower volatility, especially in a prolonged low-yield environment. Private credit has offered an attractive combination of floating rate returns, contractual cash flows, and structural downside protection, particularly relative to public credit markets.

From the borrower’s perspective, companies are increasingly looking for non-dilutive capital that offers more flexibility and certainty than traditional bank loans. Private credit has effectively filled the space between equity and conventional bank financing. 

Alan Foo: Some observers worry about private credit being a ‘bubble’. What red flags or metrics would you use to judge market health, and is it any different in Asia versus other parts of the world? 

Chwee Sing: The ‘bubble’ question is a fair one, given how quickly the market has grown. When I think about market health, I focus on a few practical indicators, rather than market size alone.

The first is underwriting discipline—leverage levels, covenant quality, and how much real downside protection lenders are building into their structures. If leverage continues to creep up, or documentation becomes meaningfully looser, that’s an early warning sign.

Second is pricing relative to risk. I look at whether spreads, fees, and structures still adequately compensate lenders for illiquidity, complexity, and loss risk.  

Third is portfolio behaviour, not just headline default rates. Early indicators such as amend-and-extend, covenant resets, and increased use of PIK interest tend to reveal stress well before defaults do. Ultimately, exits are the most reliable barometer. Performing credit is meant to be repaid, not held indefinitely, although that is a lagging indicator.

In Asia Pacific, I do not see a bubble. There may be pockets where risk-adjusted returns have compressed, often driven by localised supply-demand imbalances or heightened competition in specific segments. However, these dynamics are not broad-based nor systemic. Across much of Asia, private credit remains at a relatively early stage of development and is still meaningfully under penetrated, leaving substantial room for growth. That said, the market will continue to evolve, and managers will need to adjust their positioning to be able to scale sustainably.

Alan Foo: How much has it evolved over time? 

Chwee Sing: In Asia Pacific, quite significantly. In its earlier stages, much of the capital was directed towards higher-yielding opportunities, often in emerging markets, where investors were capitalising on market inefficiencies and unmet financing needs. Over time, however, those opportunities have become more competitive and less attractive on a risk-adjusted basis, particularly as domestic banks in many of these countries have expanded their lending capabilities and competition from private credit funds has increased. A substantial portion of historical activity was also concentrated in China real estate—where many managers have since become more selective as market conditions evolved. 

As a result, many funds that were active in these higher-yielding strategies ten to fifteen years ago have either exited the market or scaled back meaningfully. Today, capital is increasingly shifting toward more moderate-yielding but performing credit, with growing interest in near-investment-grade opportunities, as well as areas such as infrastructure and asset-based lending. There is also rising interest in hybrid strategies, where investors seek equity participation alongside downside protection, often by structuring higher leverage or higher loan-to-value exposure against high-quality businesses.

At the same time, we are seeing a growing number of domestically focused private credit managers, particularly in markets such as Australia and India. This reflects not only the deepening of these markets, but also the importance of being close to the opportunity set—both to source transactions effectively and to manage risk, while building strategies tailored to local market dynamics.

I view this evolution as a healthy one. It reflects investors adjusting to market realities, broadening the risk spectrum, and building a more scalable and durable private credit market over time.

End note: In Part 2, we move to the ground reality in Southeast Asia and Malaysia, examining where private credit is being deployed and what it means in practical terms for business leaders weighing this source of capital.

^{The views and opinions expressed by interviewees are their own and do not necessarily reflect those of PwC Malaysia. The content and people information presented are accurate as of the time of publication.}