How To Prepare For Your Upcoming Vacation Scheme
May 19, 2025
Written by Sameer Chowdhry
Introduction
Since the global financial crisis, private credit, which refers to loans made by non-banks, has been one of the fastest growing segments of the financial system. Once valued at $250 million in 2010, the asset class is currently valued at nearly $2 trillion – roughly the same size as the high-yield bond market. Once an afterthought, it has now become a major source of consideration for companies seeking financing.
This article will detail the nature of private credit, outlining factors that have contributed to its growth, before looking forward to the future of the asset class.
What is Private Credit?
Private credit refers to financing provided by non-bank lenders, such as asset managers, private equity firms, and insurance companies. Typically, companies seeking capital would either work with banks to help source and obtain funding for their needs, or raise capital through a public bond issuance on the capital markets. Private credit, however, has emerged as an alternative to these two traditional methods of financing, offering bilateral loans with a floating interest rate that are negotiated directly between borrowers and non-bank lenders.
It offers a number of benefits: including greater flexibility and faster access to capital compared to traditional bank loans. Given the bilateral nature of private credit, it can offer bespoke and flexible financing terms to meet the specific needs of the borrower, and often with more speed and certainty than a large syndicate of lenders. As private credit lenders are not constrained by risk tolerance policies and regulations of commercial banks, they are even able to offer non-investment grade lending to riskier companies.
Accounting for the Rise of Private Credit
Private credit’s meteoric growth over the past 15 years can be explained by a number of factors: (1) increased regulation on banks; (2) its ability to stay resilient amidst market uncertainty; and (3) its potentially lucrative returns for investors.
Following the 2008 global financial crisis, stricter regulations were imposed on banks. Increased capital requirements, for instance, acted as a constraint on bank lending, as traditional lenders retreated from providing leveraged finance lending to risky companies. As their risk appetite diminished, this opened the door to private credit providers to “fill in the gaps” and provide alternative financing solutions to non-investment grade companies.
More recently, after the Russian invasion of Ukraine, private credit took advantage of the market-void left by lenders who were imposed with sanctions, demonstrating its resilience during significant market turmoil. In 2022 and 2023, central banks around the world raised interest rates to combat high inflation. This put pressure on banks, which faced challenges with the existing debt on their balance sheets, reducing their appetite to lend. Alongside this, given the significant market uncertainty at the time, companies found it difficult to raise capital through the public markets. As a result, private credit lenders seized the opportunity to lend to companies in need, subsequently capturing market share from banks in the process.
Over the past 15 years, private credit’s strong returns have made it an attractive option for investors. Morgan Stanley estimates that it has returned almost 9% annually over the last decade, which is higher than that for global equities and double that for publicly traded loans. Furthermore, its floating-rate nature provides a hedge against rising interest rates, making it an appealing option compared to traditional fixed-income assets such as bonds, which lose value when rates increase. In particular, when measuring seven different periods of high interest rates between 2008 and 2023, private credit produced an average return of 11.6%, compared with 5% for leveraged loans, and 6.8% for high-yield bonds, demonstrating its resilience and ability to generate returns in challenging environments.
What’s Next
Given the rise of private credit, borrowers requiring capital currently benefit from the variety of options at their disposal. Amidst increased competition between lenders, borrowers often pursue a “dual track process”, exploring both syndicated and private credit financing at the same time. This creates competitive tension between lenders, with sponsors ultimately benefiting from greater flexibility and better pricing as a result.
However, traditional banks are increasingly partnering with private credit lenders, in a move to establish a foothold in the rapidly growing industry. For example, Citigroup recently partnered with Apollo to launch a $25 billion private credit venture, as it aims to win back business from the traditionally riskier areas of the market. For Apollo, this partnership will enable it to benefit from Citi’s extensive client relationships, providing access to a broader range of clients, and therefore, loans. This “originate-to-distribute” model, where banks originate loans but sell them to private credit lenders, such as alternative asset managers, allows them to benefit from the growing industry while managing their risk exposure, since they do not keep these leveraged loans on their balance sheets.
As private credit continues to rise in prominence, it has naturally attracted regulatory attention. Regulators such as the IMF and the Bank of England have called for increased regulatory scrutiny of the industry because of its opacity, and the extent to which it is interconnected with the financial system as a whole. Unlike the public markets, private credit does not possess a ticker, where investors are able to track a particular security on the stock change continuously throughout the day. Furthermore, the specific terms of individual loans are also private, leading to uncertainty over valuations for potential investors. Instead, valuations depend on the discretion of fund managers, prompting concerns over the accurate valuation of certain assets. This lack of transparency means it is challenging for external investors to make informed decisions, as the data required to analyse certain risks is unavailable.
The extent to which private credit has become interconnected with the broader financial system has also fuelled concerns over its systemic risk. Institutional investors such as pension funds and insurance companies, for example, are increasingly growing their exposure to the industry due to its high returns. However, given the illiquid nature of these investments, market participants can face large, unexpected liquidity issues during a downturn, where they may be unable to meet their liabilities. This could create significant capital losses for investors across the financial system, amplifying calls for greater regulatory oversight of the sector as the asset class continues to grow over time.
Conclusion
To conclude, private credit has developed from a niche financing option into a viable and successful alternative to traditional bank loans. Its unique offering, alongside high returns, has fundamentally changed the way businesses choose to raise capital. However, it does inherently present risks for lenders and borrowers alike, as regulators around the globe seek to unpack and understand this growing industry. Despite this, whether through bilateral loans, or partnerships with traditional banks, it is clear that private credit is here to stay.
Sources:
https://www.ft.com/content/6d32e665-8bd0-4d1c-b41d-d810c45922b1
https://practiceguides.chambers.com/practice-guides/private-credit-2025/uk
https://www.morganstanley.com/ideas/private-credit-outlook-considerations
https://flow.db.com/trust-and-agency-services/private-credit-a-rising-asset-class-explained#8
https://www.mckinsey.com/industries/private-capital/our-insights/the-next-era-of-private-credit
https://www.ft.com/content/bf3f3e70-e849-41db-9a29-f2e5ed988e97
