After dominating mid-market financing and successfully expanding into the large-cap space over the past 10 years, private credit is moving rapidly into its next phase of development.
Private credit assets under management (AUM) have quadrupled during the past decade and currently stand at approximately US$1.6 trillion, according to Preqin. BlackRock forecasts suggest the market could more than double to reach US$3.5 trillion by the end of 2028.
In addition to rapid AUM growth, the asset class has consistently delivered attractive yields even during economic downturns, mitigating investors’ downside risk. According to Refinitiv, private credit had a yield premium of around 157 basis points over broadly syndicated loans during the past decade. S&P figures show that between 2018-23, private credit posted a net average internal rate of return of almost 12%. Moreover, even following the period of rising interest rates between early 2022 and mid-2023, private credit defaults remained in the low-to-mid single digits.
Solid fundamentals support innovation
One of the key trends in private credit is consolidation. The strong performance of private credit has spurred a wave of acquisitions by large asset managers. For the private credit firms targeted in these deals, joining a large platform provides them with the benefits of scale and more resources, including enhanced origination and portfolio management capabilities.
For example, at the end of 2024, BlackRock agreed to a US$12 billion transaction to acquire HPS Investment Partners, a private credit firm with AUM of US$148 billion. This was part of BlackRock’s broader push into alternative assets, and according to HPS’s press release, the deal enhances their access to capital and the product mix they can offer investors and clients.
Consolidation is expected to continue to reshape the private credit market in 2025. Joining a larger platform and gaining access to a broader investor base and larger fundraising pools will help to differentiate private credit players and enhance their deal execution capabilities, particularly when competing to finance large-cap transactions.
A larger scale would enable a private credit manager to take on a larger share of big deals directly, without having to bring together a club of other direct lenders. Scale can also help to insulate a manager from downside risk and grant them more influence in the event of a restructuring or default. Being part of a larger platform can also reduce the cost of capital for private credit managers and provide certain advantages when fundraising.
Across all private market strategies, investors today are making larger allocations to fewer managers. For example, in the adjacent private equity market, Bain & Co.’s analysis showed that, in the first half of 2024, the ten largest funds that closed absorbed nearly two-thirds of the total fundraising. In a still-tight fundraising market—according to Private Debt Investor, private credit fundraising has declined slightly in each of the past three years—the benefits of scale in fundraising will continue to drive growth and consolidation in the private credit space.
A different dynamic between banks and private credit
The maturation of private credit as an asset class is reconfiguring the way banks and private credit funds interact.
Private credit has emerged as a formidable competitor to banks and eaten into the latter’s share of the leveraged finance market. Private credit first broke through in the mid-market space, but its presence has grown in the large-cap space—previously dominated by banks.
In response, many banks are expanding their own private credit capabilities. Some are raising their own debt funds, as HSBC has done by forming a direct lending team and raising funds to finance mid-market loans to private equity-backed companies. Others are forming partnerships with third-party debt funds such as the recently announced partnership between BMO Financial Group and alternative asset manager Canal Road Group to invest up to US$1 billion in direct lending.
The specifics of these types of partnerships will vary, but the overall objective of private credit players is to generate new deal opportunities through the origination networks of banks, which often include dedicated sponsor and industry coverage teams, including access to non-sponsor clients. Meanwhile, banks, which are subject to regulatory and capital requirements with respect to their leveraged debt exposures, will be able to earn fees on the loans originated on behalf of their private credit partners.
For private credit funds, working with banks can also enhance their ability to serve clients by offering diverse financing solutions. Banks typically provide working capital and revolving credit facilities, as well as other banking products including letters of credit, hedging, cash management and agency services, which would complement the term debt in which private credit firms specialize. Partnering with banks also gives private credit funds access to the banks’ exclusive origination capabilities, allowing them to source deals more efficiently without having to build out their own infrastructure.
Many of these partnerships are still in their early stages. How this model will work in practice remains to be seen, from the way in which private credit funds and banks manage the credit underwriting and credit approval process to how they would resolve potential disagreements regarding what deals to pursue.
Borrowers spoiled for choice
Overall, the developments in the private credit ecosystem should benefit borrowers, who will be able to access larger loans and a more diverse set of financing solutions from a range of providers.
Consolidation will likely make it easier for borrowers to cover their financing requirements with a single provider or a small group of providers for increasingly larger financings. Simultaneously, bank-fund partnerships give banks more flexibility by allowing them to offer their clients a menu of options including either a syndicated bank-led solution or a private credit financing option through the same relationship, whichever best suits their needs.
The syndicated loan market continues to offer strong competition for private credit, especially in large-cap deals. Over the long term, however, consolidation could reduce competition within the private credit space by concentrating activity among fewer large players.
In the mid-market space, new entrants continue to emerge, and many other private credit firms are opting to remain independent. The latter are seeking to differentiate themselves from their competitors by focusing on smaller transactions, specialist sectors such as software/technology, healthcare, or infrastructure lending, or offering alternative products such as junior or hybrid capital. Some are also targeting non-sponsored borrowers in an attempt to further distinguish themselves from larger, consolidated players.
Private credit has enjoyed a remarkable upward trajectory over the past 10 years. The next phase of its evolution is now well underway, and promises to be just as vibrant and dynamic as the last.
