Over the last five years, the global private credit market has nearly doubled in size, driven in part by a pricier and more volatile lending environment as a result of higher interest rates and market fluctuations. While the asset class has grown significantly since the pandemic, its origins trace back to well before the 2008 global financial crisis (GFC).
Private credit has emerged as an attractive lending alternative to traditional institutions, offering greater flexibility and funding speed during tightened bank lending periods and increased scrutiny. From an investor’s perspective, private credit carries an impressive track record, posting average performance returns from 10%-12% annually, and in some instances, even higher.
In a panel discussion at the Milken Institute Global Conference in May, Treasury Secretary Scott Bessent praised private credit as a valuable addition to U.S. capital markets, and observed that the “regulated banking system has been too tightly constrained.”
Leveraging exclusive insights from the AlphaSense platform, we explore the rise of private credit as a potentially lucrative asset class from its origins to rapid growth trajectory, and how institutional managers are increasingly integrating exposure to and adoption of the market in their portfolios.
A “Shock Absorber” for Market Volatility
Private, or direct, lending has doubled in size over the last five years. The asset class is expected to soar to $2.6 trillion by the end of the decade, according to insights from Morgan Stanley. Some experts have even hailed it as a “shock absorber” during periods of market volatility, such as recent turbulence due to tariff policies.
While the rise of private credit formally dates back to the 1980s, its prevalence and the sheer growth of the asset class is most notable since the global financial crisis of 2008, and more recently, the 2023 banking crisis.
According to insights from the AlphaSense platform, post-2008 GFC reforms such as Basel III and Dodd-Frank imposed stricter capital requirements on traditional banks, opening the door for private credit funds to fill the gap for leveraged and middle-market loans.
Beyond broader availability and more flexible lending terms, private credit has historically outperformed public indices. Ares Management’s CEO recently indicated his firm is “generating rates of return of 12% to 15%” across private credit strategies, acknowledging that market volatility opens opportunities for credit managers.
According to a former VP at Moody’s, the lending market is striking an equilibrium between traditional and direct lending, driving the latter to potentially secure a ratings framework in the future:
This [is] the new normal. The banks aren’t the only game in town. If you see where the business is now, you probably are happy with the ratings of the direct loans. Guessing your next question is, where are the opportunities, the opportunities are for the agencies and subtle help from the regulators to get a lot more of that unrated loan volume to create some kind of a rating to get [a formalized framework].”
– Former VP at Moody’s Investors Service | Expert Transcript
Growing Institutional Adoption
Another notable takeaway from the recent Milken conference highlights the growing institutional adoption of private credit assets across investor portfolios. A number of traditional asset managers are increasingly combining forces with private equity managers to roll out private credit ETF funds. According to Nuveen, 66% of institutional investors plan to increase their private asset allocations over the next five years.
Earlier this year, Apollo Global Management partnered with State Street to launch a public and private credit ETF. In the last several weeks, Capital Group and KKR received SEC approval to launch two new interval funds that will hold both publicly traded and private debt securities. In early May, Vanguard filed with the SEC to launch a multi-asset interval fund called the WVB All Markets Fund, partnering with Blackstone and Wellington Management, aimed at “bringing private markets exposure to a wider base of retail investors.”
While firms acknowledge there are kinks to roll out with private credit offerings, interest continues to swell as traditional managers partner with private credit investors to structure such products. At a Milken conference panel, Citigroup’s CEO shared, “I expect there to be a flurry of activity, in the next year, of different firms getting together” as traditional asset managers team up with private credit.
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Barb is a Financial Research Leader covering the financial services segment at AlphaSense. Previously, she spent more than a decade at institutional investment managers and at a SaaS startup leading business development, content, and product initiatives.
Read all posts written by Barbara Tague
