Growth and attraction of private credit

As an asset class, private credit has been around since the 1980s, but its real ascent came when traditional banks – held back by regulation and risk-aversion – left a gap in the market. Credit stories or size limitations which didn’t meet the traditional bank criteria had limited options, allowing early pioneers in private credit to provide the solution where banks wouldn’t, or couldn’t, help companies refinance debt, fund acquisitions or continue trading.

The global financial crisis of 2008 and the regulatory tightening driven by the Dodd-Frank Act and the Basel framework forced banks to retreat from many areas of middle-market lending, leaving private credit managers to fill a large void.

The Covid-19 pandemic coupled with the uncertain macro-economic climate over the last few years has only aided in reinforcing private credit funds as nimble and responsive capital provider through market volatility spikes. Today, private credit stands as a trusted and necessary lending partner across leveraged finance, infrastructure, real estate, structured products, and asset-backed finance.

The rise and staying power of private credit has been accompanied by continued investor demand, confirmed by a recent report by With Intelligence: in 2024, direct lending accounted for 50% of new LP allocations, down from 58% in 2023, while specialty finance allocations rose from 10% to 18% in the same period.

Sponsors are now adept at structuring layered capital stacks, from mezzanine (a hybrid of debt and equity financing) to unitranche (a single loan structure that blends senior and subordinated debt), and LPs are matching exposure to their own risk-return expectations. In a world where public markets can be slow and impersonal, private credit can offer speed, flexibility, and ultimately, discretion.

No longer just debt

The growth of private credit platforms and investor participation has introduced a higher degree of discipline and sophistication to the sector, with fund structures evolving significantly.

What were once simple direct lending vehicles have now become multi-strategy credit platforms, typically offering customised risk-return profiles. Underwriting has become more granular, with deeper analysis at the deal level. Meanwhile, a secondary market is rapidly growing, hinting at future liquidity in what has long been considered an illiquid asset class.

The Federal Reserve Bank of New York suggests that non-bank financial institutions (NBFIs) and banks have become so interconnected over time that it’s better to see them as having evolved together, rather than separate entities or simply shifting activities from banks to NBFIs: Oaktree’s partnership with Lloyd’s bank is a case in point, a tie-up providing up to £175mn to fund private equity takeovers and help refinance upcoming debt maturities (Business Wire). In these partnerships, private credit funds bring agility and tailored underwriting, while partnered banks offer the scale and infrastructure to best serve businesses and ultimately drive meaningful returns..

Structured finance

The next chapter in private credit’s evolution - structured finance - may test just how well banks and credit funds can work together.

Investor appetite is growing for higher-yielding, more complex instruments like riskier tranches of Collateralised Loan Obligations (CLOs), bespoke securitisations, and asset-backed deals. One structure gaining traction in Europe is synthetic risk transfer (SRT), which allows banks to stay active in direct lending while shifting the credit risk to private credit funds.

According to Deutsche Bank and ECB data, SRT deal volumes referencing performing loans hit €155 billion in 2023 - up from €120 billion in 2019. Whether this trend enhances or endangers financial stability depends on how these deals are structured. Advocates argue that SRTs help spread risk more efficiently between banks and investors, making the system more resilient. (Deutsche Bank, European Central Bank). But not everyone agrees—Moody’s recently warned that the growing entanglement between large banks and private credit could become a “locus of contagion” in a future financial crisis.

Regulation and resilience

The signs remain reassuring. Specialist funds and structuring expertise have kept pace with demand, with 66% of private credit manager respondents now stating that they are employing leverage within their investment strategy (Alternative Credit Council).

The involvement of retail or lightly informed investors - via ETFs or semi-liquid vehicles – will, along with the rate of growth, continue to attract regulatory attention However, private credit operates on different plumbing than the public markets: longer-dated capital, tighter lender-borrower relationships, and covenants that bite when they need to.