The rise of private credit has been one of the standout success stories in private markets over the past decade.
Rapid expansion following the 2008 global financial crisis has given way to more predictable AUM growth in recent years. Yet beyond the headline figures lies an evolving asset class where resilience and innovation, in equal measure, are prerequisites to navigating today’s complex investment environment.
While private credit’s origins lie in distressed and mezzanine financing, it was the crisis that accelerated its growth on both the supply and demand fronts. As regulatory changes further constrained bank lending activity, institutional investors turned to private credit in search of yield amid historically low interest rates.
Direct lending — privately originated and held debt extended to performing companies — was central to private credit’s rapid expansion. With fewer regulatory constraints and greater flexibility than traditional lenders, private credit managers were able to provide larger loan packages with a wider range of senior and junior instruments than was typical in bank lending or public markets.
This flexibility came with increased risk, but also return. Between 2013 and 2023, direct lending yields carried a premium of 200 to 300 basis points over comparable leveraged loans, according to the Federal Reserve paper “Private Credit: Characteristics and Risks”. With near-zero base rates from 2009 to 2015, these spreads offered a meaningful incremental return that spurred strong institutional demand.
Reflecting that momentum, direct lending AUM posted its largest annual increase in 2015 — up 43 per cent — and grew at an average annual rate of 27 per cent from 2009 to 2021, per Preqin.
However, the first Fed rate hike in 2022 marked an inflection point for the asset class. Persistent inflation, tepid economic growth, and higher interest rates in the post-Covid environment were complicated by geopolitical conflict and, more recently, policy uncertainty from the world’s largest economy. For the first time in its short history, private credit would need to navigate a downturn in the credit cycle.
So how has the asset class fared?
While delivering yield enhancement during the 2010s, direct lending has offered equity-like returns in recent years, with base rates of 4 per cent to 5 per cent and spreads pushing yields into the teens.
According to Alternative Credit Council’s Financing the Economy 2024 report, gross returns (excluding fund-level fees) ranged from 12 per cent to 17 per cent in 2024 across a selection of top managers.
At a time when private equity distributions have slowed, private credit also provided a steady source of liquidity, aided by a wave of refinancings in 2024.
That said, distress, defaults, and out-of-court restructurings are on the rise as borrowers grapple with higher rates and slower economic growth. Analysis from Moody’s found that PE-backed companies — core private credit borrowers — had a default rate of 17 per cent from early 2022 through mid-2023, double that of non-sponsored companies.
MSCI Research similarly reported that senior loan writedowns of 20 per cent or more nearly tripled over the past two years. Loan term amendments — such as covenant waivers and PIK amendments — are also on the rise; whether these measures reflect genuine value preservation or merely delay losses remains to be seen. Regardless, translating today’s higher yields into realised investor returns will not be straightforward.
Despite these headwinds, private credit managers continue to evolve their business models — both in raising and deploying capital. While institutional demand has declined since its 2021 peak, fundraising in the private wealth channel has filled the gap, reaching $67bn in 2024 — a 40 per cent year-on-year increase, according to Pitchbook’s 2024 Global Private Debt report.
At the same time, large private market platforms deployed an estimated $21bn from affiliated insurance businesses into private credit in 2024. Together, these two sources represented nearly half of all credit fundraising across seven major US public alternative asset managers and are expected to remain key growth drivers.
On the investment side, managers are diversifying beyond the corporate lending activity that drove the asset class’s initial growth. According to Alternative Credit Council’s Financing the Economy 2024 report, asset-backed financing, real estate debt, and infrastructure debt now account for 40 per cent of the $2tn in AUM among managers surveyed.
Like the first growth wave, this shift has been partly driven by regulatory change, with the finalised Basel III framework expected to increase capital requirements across these sectors.
Over the past 15 years, private credit has transformed from a niche strategy to a diversified, multi-trillion-dollar asset class. While fundraising and investment innovation offer a glimpse of the future, the asset class’s short-term success likely rests on the resilience of direct lending. Only time will tell if the flexibility of this strategy and the ingenuity of its practitioners can weather the challenging road ahead.
Bowen White is the author of two books on private market investing and an adjunct professor at Singapore Management University