The Emergence of Private Credit

Discover how private credit has transformed from a niche investment strategy into one of the most significant forces in modern finance. In this comprehensive overview, Philip Waddilove, Financial Trainer at GICP and Fitch Learning, explores the remarkable rise of private credit as a compelling alternative asset class.

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Today, I want to talk about one of the most significant shifts in modern finance — the rise of private credit as a compelling alternative asset class. Over the past decade, private credit has moved from the shadows of niche investing into the spotlight, reshaping how companies borrow and how investors seek returns. At its core, private credit is non-bank lending—direct loans extended by asset managers and other non depository institutions to corporate borrowers, often private equity-backed companies. This disintermediated model bypasses traditional banks and public markets, offering bespoke financing solutions tailored to borrower needs.

The growth has been extraordinary: global private credit AUM reached $1.7 trillion in 2023 and is forecasted to hit $2.8 trillion by 2028. As with all markets, the emergence of Private Credit comes down to a mix of supply and demand, and it may be helpful to think about these as a mix of Push and Pull factors. Push factors originate from the banking side. After the Global Financial Crisis, regulations like Dodd-Frank and Basel III imposed stricter capital requirements and leverage limits on banks, reducing their appetite for lending to sub-investment-grade borrowers. Consolidation in the banking sector further limited access for middle-market companies.

These dynamics created a funding gap, especially for firms seeking flexible, customized financing. During periods of market volatility—such as the COVID-19 shock—syndicated loan markets often froze, leaving borrowers stranded. Private credit stepped in, offering certainty of execution when public markets faltered. Pull factors explain why investors have embraced private credit. Historically, annual returns have exceeded those of high-yield bonds and leveraged loans by 400– 500 basis points, thanks to the illiquidity premium and bespoke structuring. Most loans are floating-rate, providing a natural hedge against rising interest rates—a critical advantage in recent years. Moreover, private credit exhibits low correlation with public markets, insulating portfolios from mark-to-market volatility.

For institutional investors—pensions, insurers, endowments—this stability, combined with predictable income streams, has made private credit an attractive allocation. Access is even expanding to retail investors through special companies called Business Development Companies – BDCs (tax efficient vehicles analogous to a Real Estate Investment Trust), semi-liquid funds, and innovations like tokenization. Borrowers also value private credit for its speed, confidentiality, and flexibility. Deals can close in weeks rather than months, with tailored covenants and higher leverage availability compared to broadly syndicated loans.

Looking ahead, private credit is poised for continued growth, but not without challenges. Increased competition for deals risks a ‘race to the bottom’ in underwriting standards, while opaque valuations and concentrated exposures warrant vigilance. Still, as banks retrench and capital markets remain volatile, private credit’s role as a core alternative asset class is firmly established. In short, private credit has become a strategic choice for both borrowers and investors. Its ability to deliver higher returns, structural flexibility, and resilience in volatile markets ensures it will remain a powerful force in global finance.

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