Private credit

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Private credit is an asset defined by non-bank lending where the debt is not issued or traded on the public markets. Private credit can also be referred to as "direct lending" or "private lending". It is a subset of "alternative credit". As of April 2024, the IMF estimates the size of the global private credit industry at just over $2 trillion, most of which is in the US, rivalling the high yield and leveraged loan markets.^[1] JPMorgan argues that the IMF may be underestimating the true size of the industry, the bank estimates the size of the global credit market at $3.14 trillion.^[2]

The private credit market has shifted away from banks in recent decades. In 1994, U.S. bank underwriting covered over 70 percent of middle market loans.^[3] By 2020, U.S. banks issued/held around 10 percent of middle market loans.^[4] Direct lending market expanded rapidly in the wake of the 2008 financial crises when the SEC tightened restrictions and capital requirements on public banks. As banks decreased their lending activity, nonbank lenders took their place to address the continued demand for debt financing from corporate borrowers.^[5]

Private credit has been one of the fastest-growing asset classes.^[6] By 2017, private debt fundraising exceeded $100B.^[7] One factor for the rapid growth has been investor demand. As of 2018, returns were averaging 8.1% IRR across all private credit strategies with some strategies yielding as high as 14% IRR.^[8] At the same time, supply has increased as companies have turned to non-bank lenders after the financial crisis due to stricter lending requirements.^[9] Private credit investment rose in emerging and developing markets by 89% to US$10.8 billion in 2022.^[10]

One recent trend has been the rise of covenant-lite loans (which is also an issue for publicly traded investment grade and high yield debt).^[11] This has been driven by investor demand for the relatively high yield compared to alternatives and a willingness to accept less protections. This has resulted in fewer company restrictions and fewer investors' rights if the company struggles. That being said, for the investment firms, covenant-lite loans can also be helpful because of the negative optics if a portfolio company goes into default, and fewer restrictions means fewer ways a company can go into default.^[12]