(Editor’s Note: This article was created with assistance from ChatGPT)

In the evolving world of corporate finance, private credit has emerged as a formidable force, challenging traditional banking paradigms. Once a niche segment, it has burgeoned into a $1.5 trillion market as of early 2024, with projections estimating growth to $2.6 trillion by 2029. This surge is not merely a quantitative shift, but signifies a qualitative transformation in how businesses access capital.

The Rise of Private Credit

Private credit refers to nonbank lending, often characterized by direct, negotiated loans between borrowers and lenders. Its appeal lies in the flexibility and speed it offers compared to traditional bank loans. Borrowers benefit from customized financing solutions, while investors are attracted by the potential for higher yields.

Several factors have fueled the growth of private credit:

• Regulatory Constraints on Banks: Post-2008 financial regulations, including Dodd-Frank and Basel III, have tightened capital requirements for banks, limiting their ability to lend, especially to riskier borrowers.
• Investor Demand for Yield: In a low-interest-rate environment, institutional investors have sought alternative assets offering better returns, making private credit an attractive option.
• Bank Retrenchment: Banks have pulled back from certain lending activities, creating a void that private credit firms have been quick to fill.

Private Credit vs. Traditional Bank Lending

While banks have traditionally dominated corporate lending, private credit firms are increasingly encroaching on this territory. The advantages of private credit include:

• Speed and Flexibility: Private credit deals can often be executed more quickly than bank loans, with terms tailored to the borrower's specific needs.
• Less Stringent Covenants: Private lenders may offer more lenient covenants, providing borrowers with greater operational flexibility.
• Customized Solutions: Private credit can cater to complex financing needs that may not fit within the standardized frameworks of bank lending.

However, this shift is not without challenges. Banks are responding by forming partnerships with private credit firms to retain client relationships and participate in lucrative deals without bearing the full risk.

Asset-Based Lending: A New Frontier

Asset-based lending has traditionally been the domain of banks. However, private credit firms are making significant inroads into this space. The growth of ABL within private credit is driven by:

• Extended PE Hold Periods: According to McKinsey’s Global Private Markets Report, average PE hold times have stretched to 6.7 years—well above the 5.7-year average of the past two decades. Companies in PE ownership for more than four years now comprise 61% of all buyout-backed assets, up from 55% last year.
• Demand for Flexible Financing: Companies seeking more adaptable financing solutions are turning to private credit for ABL needs.
• Higher Yields for Investors: ABL offers attractive returns for private credit investors, further fueling interest in this segment.

This trend is fueling explosive growth in the asset-based lending market, which is projected to reach $1.26 trillion by 2028, according to The Business Research Company. For PE portfolio companies in extended holding periods, ABL offers crucial advantages: fewer financial covenants than cash-flow loans, flexible funding based on asset value rather than EBITDA multiples, and often lower overall cost of capital. U.S. Bank reports that ABL is “especially attractive for companies experiencing significant transition, including high growth, acquisition, sale or dividend recapitalization”—precisely the scenarios many PE portfolio companies face during extended ownership periods. The shift reflects ABL’s evolution from its previous reputation as a distressed financing tool to a mainstream solution for healthy PE-backed companies needing growth capital beyond their funds’ typical investment horizons. With 58% of institutional investors planning to prioritize ABL strategies this year according to Preqin surveys, and transaction sizes regularly reaching the $50-60 million range, asset-based lending appears positioned for continued strong growth as PE firms adapt to the new reality of longer holding periods, according to MacFarlanes.

Global Expansion and Strategic Partnerships

Private credit's growth is no longer limited to the U.S.—it’s becoming a truly global phenomenon. Firms are actively expanding into international markets, with Europe and Asia emerging as particularly promising regions. For example, Carlyle Group has deepened its presence in Europe by launching a private credit strategy aimed at wealthy individuals, with a focus on direct lending and asset-backed debt. Similarly, KKR has been ramping up its activity in Asia, investing in a variety of credit opportunities across the region, including infrastructure and real estate financing. Another example is Apollo Global Management, which has established partnerships and offices across Europe and Asia to tap into the growing demand for private credit outside of North America.

At the same time, strategic partnerships between banks and private credit firms are gaining momentum. These collaborations allow traditional financial institutions to offer clients exposure to private credit while navigating regulatory limitations. A notable example is UBS teaming up with General Atlantic to expand into private credit, enabling the bank to diversify its offerings. Likewise, HSBC has partnered with private equity firm Mount Street to scale its private credit footprint, reflecting a broader trend of banks seeking alternative avenues to generate yield and serve institutional clients more effectively. Additionally, Barclays has entered into a joint venture with AGL Credit Management, aiming to broaden its access to private credit investments and strengthen its asset management capabilities in the alternative credit space.

Challenges and Considerations

Despite its rapid growth, private credit still faces a number of challenges and important considerations. One key issue is liquidity. The increasing popularity of evergreen funds—which provide only limited liquidity—can become problematic during periods of market stress. If too many investors try to pull out their money at once, managers may be forced to sell assets at depressed prices, creating additional strain.

Another concern is regulatory scrutiny. As private credit continues to expand and gain prominence, it's likely to draw more attention from regulators. This could lead to tighter rules around transparency and risk management, areas where the industry has traditionally had more flexibility than public markets.

Finally, there's the question of market saturation. As more firms jump into the private credit space, competition is heating up. This can put pressure on yields and may lead to looser lending standards as firms try to stay competitive.

The Road Ahead

Private credit's trajectory suggests it will continue to play an increasingly central role in corporate finance. Its ability to provide tailored, flexible financing solutions positions it as a formidable alternative to traditional bank lending. However, as the market matures, stakeholders must navigate the associated risks and ensure robust risk management practices are in place.

Note: This article is based on information available as of May 2025 and incorporates insights from various industry sources.