Much of what you read or hear about private credit is only part of the story. Private credit is a growing investment asset class and, yes, more of the loans the industry are making often come at the expense of banks’ balance sheets.
But if that’s the extent of the commentary, then that’s missing what we believe is the more crucial thing to know: the rise of the private credit ecosystem is causing a fundamental realignment in the debt value chain in capital markets — and that’s prompting financial services broadly to bend toward private credit’s gravitational pull.
The rise of the private credit ecosystem is causing a fundamental realignment in the debt value chain in capital markets, prompting financial services broadly to bend toward its gravitational pull.
With banks’ lending platforms being put in tightly controlled fields of play due to regulations, private credit is becoming the arena where tailored solutions are being built to help allocate debt capital. Those tailored solutions are not meant for special circumstances; private credit’s practitioners are aiming to become a normal part of everyday lending.
But for private credit to rival the size of today’s public debt and bank syndicated loan markets, leaders in the industry and their partners should evolve their operations. The solutions they develop can’t simply imitate today’s offerings but instead make an indelible mark in the entry points in the debt value-chain, ranging from deal funnel and origination to underwriting, structuring, placement and distribution.
While credit markets are already changing, there is still a lot more transformation that can be driven by the outward expansion of private credit lending. What’s becoming more clear lately is that private credit’s influence on existing debt systems is accelerating rapidly. Private credit, we believe, is well positioned to rewire debt capital markets, affecting the firms who participate in it.
The recent global trade uncertainty and market volatility could catalyze private credit’s next growth phase. Today’s worsening economic conditions and cautious mood provide an important test of the private credit industry’s dual claim that it can keep debt capital flowing in tough times while also helping manage the downsides of the loans it’s currently holding.
While those claims held true during the pandemic and the Great Financial Crisis, the industry’s much greater size today and deeper connection to mainstream companies is reviving concern that there could be a systemic feedback loop to the broader economy if private credit loan defaults rise. The eyes of regulators, investors and companies are on the industry to see what transpires. Meanwhile, private credit lenders march ahead with their eye on taking a much larger slice of the existing credit universe.
Private credit is not a private version of what happens in public markets and bank syndicated lending. It’s different; a more streamlined routing of credit from pools of capital to borrowers — as we discuss below, it’s a step up in efficiently matching assets and liabilities. Private credit is producing systems of capital raising, investment tailoring, lending customization and origination that can better serve the needs of investors — who are realizing predictable, long-term returns on so-called “permanent” capital — and borrowers, who desire dedicated lending commitments and customized financing to fund their strategic plans.
There’s another important benefit, one that’s often overlooked in private credit commentary we read. And that’s the tax strategies that can be employed at the investment vehicle level to help bolster returns and additionally at the corporate level to enhance borrowers’ financial planning and flexibility. Customization at scale is often a key reason why private credit is not a carbon copy of the traditional lending systems.
Put simply, private credit’s ecosystem is producing benefits and customization for investors and borrowers, while also bringing assets and liabilities into closer alignment, helping set the stage for more impact on debt markets.
For example, many insurers who take part in a private credit loan that is structured like a private placement bond may be able to qualify that as a Schedule D asset — resulting in a lower risk-based capital rating compared to a schedule BA asset. Other insurance or pension specific protections can also be added, such as seniority and covenants that can reduce the potential for losses and lower risk-capital ratings.
For many borrowers, repayment in a traditional system is typically set to a calendar and is made in cash, whereas private credit lenders may be comfortable accepting payment-in-kind (PIK) or other means such as equity-like securities. In addition, banks are limited by regulation from lending to highly leveraged companies; private credit has no such regulation limiting the decisions of a fund’s credit committee. Collateral considerations and cash flow metrics are also highly customizable to the business’s needs. And now that there’s more capital flowing into private credit investment strategies, many private credit loans today are bigger, in some cases completely replacing bank syndicated lending. These larger private credit loan packages are also senior in the capital stack and first lien, again taking the place of what typically would be bank lending.
It’s the recent influx of capital that’s helping private credit become a mainstream offering. Combined private debt unrealized value and dry powder (meaning uninvested capital) was $1.05 trillion in September 2024, up approximately 94% since the end of 2019, according to Preqin, S&P Capital IQ data. Also showing enormous growth is a move toward taking market share away from traditional lending channels as evidenced by the number of debt deals worth $1 billion or more. They totaled 51 last year, eight times more than 2020’s activity, according to Pitchbook data.
There's almost no part of the traditional credit system that’s untouched by that kind of eyepopping growth, from the growing number of investors allocating capital, banks partnering on private-credit funded loans, borrowers seeking access to more flexible capital and the constellation of firms rolling out new offerings in custody, market-making, data monitoring and other services that are needed to help fuel private credit’s expansion.
More importantly, the foundation of the private credit ecosystem — where lending decisions are made at the fund level — provides the capability to produce customized debt solutions for many different corporate and consumer borrowers.
Public credit markets and banking often start with borrowing demand, and then raise capital to support that demand.
The flow of capital through private credit’s ecosystem is typically more direct and streamlined compared with much of today’s credit system. A central lending committee at a private credit fund replaces much of the machinery and friction involved in bank or public financing, such as maintaining credit ratings, setting up investor relations departments to liaise with creditors and constant monitoring of leverage ratios and other loan covenants.
That difference, we believe, gives private credit a compelling reason to help attract more corporate borrowers. And it’s not just less friction that can be beneficial, many companies are also willing to pay a premium yield in return for speed of closing, bespoke terms and certainty of funding. But private credit’s advantages do not automatically set up a conflict between traditional ways of allocating credit and private credit. The ecosystem growing around private credit is moving towards more cooperation with many aspects of the traditional workflow. This cooperation is often practical: private credit’s expansion can be accelerated by plugging into traditional lending operations which already have mature systems and trusted relationships with mainstream, investment-grade companies. Meanwhile, on the capital-raising side, private credit is also cooperating more with traditional asset managers as a growing share of non-institutional investors demand access to private market investments, including new exchange-traded funds (ETFs).
Platform deals and partnerships between fund sponsors and banks, for example, are bringing traditional and alternative sources of credit closer together. What’s attractive about that kind of partnering is that traditional credit providers can offer private credit’s bespoke lending agreements that a growing number of borrowers find attractive. And that partnership can make it possible for banks to hold the senior tranches of debt during a private credit deal to adhere to regulations while private credit fund managers retain the riskier, higher yielding portions.
But to scale up such a system to serve many more companies and the wider investing world, private credit will likely require help from a wide range of financial services firms, ranging from origination platforms, financial advisors and wirehouses, accounting and audit services, custody and so much more. The traditional financial system isn’t being sidelined, it’s being repurposed to serve an important purpose: to help private credit address the long-standing asset/liability mismatch in the banking system and reduce credit repricing shocks that can trigger financial uncertainty, while also helping provide the long-duration returns investors need so they can to meet the needs of their clients.
Structurally, capital sources and private credit products can address the funding, liquidity and other financial risk mismatches inherent to the deposit-dependent banking system and to a lesser extent in the publicly traded debt markets. This is more clear when trouble strikes.
Generally speaking, banks use short-term funds, i.e. deposits, to fund longer-term loans. That can create an asset/liability mismatch — meaning that when depositors want their money back, the bank cannot easily turn its loans into cash to replenish capital. Put simply, the tenor of the deposit does not match the tenor of the loan.
Macroeconomic uncertainty can also be problematic from a borrower’s perspective. During troubled times, banks may hoard capital by reducing lending especially to riskier borrowers. And should bad times devolve into financial duress, an institution may shut off lending entirely, including the pulling of previously agreed upon credit facilities.
Private credit, however, is unlikely to face a so-called “run on the bank.” Private credit aggregates capital from investors who are committed to long holding periods and, unlike depositors, cannot at a moment’s notice demand the return of their investment. Instead, the private credit fund’s duration is fixed when it launches, and the fund’s lending committee seeks out credit opportunities that closely match that time frame. In essence, the illiquidity of the loan is matched by the illiquidity of the capital backing that loan.
Private credit aggregates capital from investors who are committed to long holding periods and, unlike bank depositors, cannot at a moment’s notice demand the return of their capital.
Additionally, since private credit pools capital and then lends, it has financial resources in reserve to continue lending during tough economic times when other credit providers may be cautious. That’s a highly attractive feature for many investors as lending to a diversified set of riskier companies through the economic cycle has been shown to produce more predictable, steady returns.
The ability to keep credit flowing during tough economic times is also attractive to borrowers of various types, but especially businesses which are trying to execute their growth plan during the ups and downs of the economy. By its nature, private credit attracts capital that is often positioned to ride out uncertainty or a few quarters of poor corporate financial performance. Consider a pension fund or insurance company that expects a payout to a beneficiary several decades in the future. Cash outflows that are 40 or more years in the future are not easily matched in public markets. However, investments that generate steady and predictable cash flows can be used to reduce the odds of underfunding in pension or insurance as investment returns keep pace with cost-of-living increases. Trillions of dollars are needed to keep pension benefits flowing. One firm estimates that underfunding for the 100 largest public pension funds stood at $1.34 trillion as of March 31, 2025.1
As a result, two important credit market concerns for borrowers — the lender’s financial health and the availability of debt facilities during economic downturns — are greatly reduced when using private credit as a source of funding.
Private credit is more mainstream now, yet it’s not new, having been first used some three decades ago. What propelled its recent growth? Market participants commonly point to the Dodd-Frank regulatory reform for leveraged lending as an important catalyst as that constrained banks’ risk taking, providing an opening for private credit. Also important to private credit’s growth is the acceptance among investors of junk bonds, syndicated loans and collateralized loan obligations (CLOs). Those products conditioned investors to create portfolios of below-investment grade credit risk to help drive greater returns. Private credit’s initial growth in riskier debt tranches (and associated higher returns) helped it win over investors. As success is built upon success, it is becoming easier to raise blockbuster credit funds. According to Pitchbook data, the five largest private credit funds raised last year all attracted over $10 billion each – combined those five funds hauled in $77 billion.
Based on our research, we believe the private credit industry will likely be far more disruptive to credit markets than syndicated loans or junk bonds. Private credit has expansive ambitions to finance nearly everything: corporate and commercial financing, infrastructure buildouts as well as consumer lending. Disruption also can come from the capital side of the equation as the industry often goes after ever larger pools of investor capital. Institutional investors and insurance companies were the first to take part, but now the private credit ecosystem is increasingly creating tailored products for wealthy individuals, family offices and retail investors where there is significant demand to include private credit exposure in investment portfolios.
Private credit will likely have staying power and not simply because it can be broadly used. It has longevity because it directly addresses one of the fundamental problems of long-term illiquid financial assets — asset and liability mismatch in the current debt capital system. This can be a ubiquitous problem. Take a look at the majority of debts in the corporate, government and consumer realms. What you can find is that most are bilateral, long-term financing agreements or pools of receivables — meaning they are, by their nature, illiquid. This can be especially true in insurance, where we see many insurers have only touched the surface of what they may be able to accomplish for their general account by leveraging private credit vehicles.
What is meant by the term private credit is “in the eye of the beholder” in that different market participants have their own definition. For the purposes of understanding the changes in the market, we suggest private credit agreements be defined based on the following features:
As the industry expands, it’s almost simpler to frame the question, “what does private credit exclude?” As of today, private credit generally excludes most (but not entirely) the following markets:
Given private credit is an alternative method to public and banking credit funding and has ambitions to move into each of the lending markets, how big is the total addressable market (TAM)? Seven of the largest private credit firms have made public projections, and on average they say the TAM is about $31 trillion dollars, according to PwC research covering firms with approximately $1.24 trillion in private credit AUM. While that’s a staggering 15-times larger than the current private credit market, our research shows that continued strong growth can be plausible. Private credit’s adaptability makes it applicable to many lending situations and the industry is already expanding into various parts of debt capital markets, financing and lending.
The private credit playbook is about creating a synchronous ecosystem of value among originators of credit opportunities, borrowers and investors — with private credit managers remaining as the matchmaker between capital and borrower. This playbook is reapplied in different forms and is evolving to service different markets based on that market’s individual needs. Still, there are benefits to the participants in the ecosystem regardless of the type of lending or the market.
The private credit playbook is about creating a synchronous ecosystem of value among originators of credit opportunities, borrowers and investors.
It would be an oversimplification to solely highlight the higher returns generated in private credit with lower mark-to-market volatility and higher rates of interest. And it’s a common criticism that private credit returns have not been subject to prolonged periods of significant market distress. Still, private credit can offer investors:
Credit originators of different stripes (bank and non-bank) suffer from the same challenge — limited balance sheet capacity. As a result, many originators are typically managing a delicate balance of maintaining the customer relationship to support future opportunities while selling the credit to unaffiliated third parties. Private credit is increasingly the balance sheet of choice for these models.
Private credit has historically been synonymous with expensive debt. However, this is a highly competitive market and to win deals, private credit has increasingly raised cheaper forms of capital to help drive more competitive pricing, along with offering customized lending solutions. To look solely at the interest rate of a private credit-backed loan is to lose sight of the holistic range of characteristics companies typically find attractive when seeking funding.
In an age where various types of clients are demanding customization, private credit can help deliver in ways that are often difficult for traditional bank or public market financing to replicate. Still, it bears repeating: the parties in the existing debt value chain are finding ways to benefit from private credit’s locked-up capital model.
Financial innovation of any type rightly elicits questions about whether it might cause systemic issues. And those questions take on a heightened level of concern if the consequences of that innovation are difficult for both government regulators and the public at large to monitor. Private credit, being private, is both unregulated for the most part and beyond the reach of regulators to compel reporting.
We can imagine other risks that current commentary doesn’t often address. For instance, the bespoke nature of private credit deals is a sizable risk as lenders don't necessarily have controls or oversight over the terms in a deal. Additionally, these deals are highly structured for regulatory and tax purposes; changes in law could greatly alter the returns and have other negative effects. From a tax point of view, investors often invest in private credit through tailored and sometimes bespoke structures to enhance their after-tax returns which require ongoing maintenance and diligence to confirm that operational mistakes are not made that would erode any of the intended benefits. Manifestation of any of these risks could greatly reduce investor participation in private credit.
From our vantage point, what we see is the much of the private market ecosystem working to address and adapt to these and other risks. As the industry grows and encounters fresh questions and concerns, debate and discussion result in innovative ideas to monitor and help mitigate the potential downside. That’s encouraging. Each participant should up their game and design tools and solutions so they can adequately measure risk, monitor the evolution of risk and provide warning signs as early as possible. In the end, the goal is to reduce the probability of a systemic crisis, and we see an industry that is actively working towards that goal.
We see the benefits of private capital driving a long-term and permanent change to debt capital funding markets. The benefits across the debt value chain are significant and, economic headwinds notwithstanding, the business model of private credit is likely to continue to drive more interest from investors, originators and borrowers who want to participate in the benefits this ecosystem offers.
1. Dow Jones Institutional News, “Milliman analysis: Public pension funded ratio drops to 79.5% in March”, April 18, 2025, accessed via Factiva May 6, 2025.
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