The Private Credit Boom

Since gaining momentum after the Global Financial Crisis in 2008, and later being reinvigorated by the U.S. banking crisis in 2023, the private credit market continues to turn heads with investors. The asset class, currently valued at $2.1 trillion, is increasingly popular as an alternative to public,or syndicated,lending. 

According to research from BlackRock, it is estimated that private credit will grow to $3.5 trillion by 2028. With a lingering perfect storm of market volatility and record high interest rates, private credit—or direct lending— has swept in to fund businesses that otherwise wouldn’t be able to receive loans from large banks, or mature enough to issue bonds.

Investors have turned to private credit as a lucrative asset class in light of macroeconomic conditions, as an opportunity to capture attractive returns. 

Below we explore the origins of private credit and the trends driving its foothold with the institutional community, including considerations and opportunities for investors. We’ll also share expert perspectives on the booming asset class, sourced from the AlphaSense platform. 

The Origins of Private Credit

Private credit is categorized across four primary types: 

• Direct Lending: Provides lending primarily to private, non-investment-grade companies. This is a highly appealing type that is the least risky of the four classes, offering steady income and priority payment standing.
• Mezzanine Debt: Mezzanine debt is subordinated debt and is not secured by assets. It also ranks below more senior loans for repayment in the event of default or bankruptcy. With high return rates, it is also an attractive type of private credit.
• Distressed Debt: Companies experiencing financial distress work with investors to restructure their balance sheets and operations. Distressed debt is highly specialized and tends to coincide with economic downturns and periods of credit tightness. These lenders take on a higher level of risk in exchange for lower prices and potentially high returns.
• Special Situations: Includes other situations outside the realm of everyday business activities that require capital. This can consist of: corporate restructuring, mergers and acquisitions (M&A), spin-offs, divestitures, bankruptcy processes, and other activities.

In the 1980s, as banks encountered regulatory tightening, private credit began to emerge as a viable alternative. It presented new avenues to capital access for companies that were deemed too large or risky for commercial banks, and too small to raise debt in public markets. During this period, private debt funds started taking shape, providing a promising solution for mid-market companies unable to secure traditional bank financing.

The 2008 Global Financial Crisis was a catalyst for the private debt boom. Prior to the crisis, the asset class held under $400 billion in total assets. By 2023, the figure had increased five-fold to over $2 trillion. The collapse of Silicon Valley Bank triggered the 2023 US Banking Crisis, which resulted in three mid-sized banks collapsing in five days.

Following the 2023 banking crisis, regulatory reforms tightened lending guidelines for traditional banking institutions. With banks becoming less willing to lend to middle-market firms that had riskier profiles in the US and Europe, private credit emerged to fill the void. 

Opportunities for Investors

Private credit has established itself as an attractive alternative to traditional lending, providing quicker accessibility to funds and greater flexibility with lending terms than its public counterpart. Institutional investors have flocked to the asset class during lingering periods of economic instability, particularly over the last couple of years.

It’s easy to understand the appeal. Investing in private credit is a complement to fixed income exposure within a portfolio, posting higher income than leveraged (syndicated) loans, and providing diversification across market cycles. Private credit has also consistently out-performed prominent public indices over the last couple of decades, as illustrated below.

Despite historically impressive returns, there are potential downsides to private credit investment. Companies that turn to private financing are often smaller and have larger risk profiles, including more debt. For the most part, private market loans also have non-traditional valuations and are not publicly traded, leaving the potential for outdated or misleading metrics. 

With increased competition from banks, there are fears of lower underwriting quality and the prevalence of ‘covenant-lite’ loans, which are inherently riskier for lenders. Recent findings from JP Morgan debunk this notion however, with only about 20% of direct lending deals over the last year observed to be covenant-lite. By contrast, about 90% of broadly syndicated loans from the group were covenant-lite.

Industry Insights from AlphaSense

With expert perspectives derived from the AlphaSense platform, we dive deeper into this trending asset class to gain a holistic view of the insights and opinions trending with industry-leading experts.

A former Bank VP and competitor to Blue Owl Capital believes the private credit asset class is more than just a passing trend:

“I think that the trends in the market are going to bode well for private credit. Particularly coming out of what happened with SVB and the broader liquidity that’s being sucked out of regional banks, coupled with some of the market dynamics we’re experiencing here in the institutional market. I think it’s going to be a more permanent swing to private credit.”

– Former Bank VP | Expert Transcript

A former principal at a private equity firm believes interest rate fluctuations work in favor of private credit: 

“On the private credit, as banks have started tightening their lending, plus given where their interest rates and yields are, it is becoming a very interesting asset class because private credit is able to offer a certain degree of flexibility which banks are not able to offer. If interest rates are where they are, then flexibility becomes super important for some of these players.”

– Former Principal at KKR | Expert Transcript

Another expert weighed in on the booming asset class: 

“Once again, if we’re talking about private credit, it is far and away the fastest-growing part of the alternative investment space. It seems like all the alternative investment companies are leaning in that direction one way or another.”

– Former Principal at KKR | Expert Transcript

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