The growth of private credit should persist in 2025, in our view, continuing a decade-plus trend. The asset class’s steady expansion suggests a growing recognition of the role it can play as both a complement and diversifier to traditional credit investments. Much of the growth to date has been concentrated in areas where banks have retreated due to tightening lending standards, such as the leveraged credit markets. However, we believe the next phase of growth could increasingly encompass sectors at the intersection of public and private markets as well as be in partnership with bank originators. 

Today, the potential addressable market for private credit exceeds US$30 trillion across a diverse range of asset classes (Figure 1). Importantly, a sizable portion of the addressable market falls outside of the traditional leveraged corporate debt found in many private credit portfolios today. We believe this could present a substantial opportunity for investors who can broaden their lens on private credit and navigate the market’s near- and long-term trends to drive consistent value for clients.

In this 2025 private credit outlook, we explore five of the key themes we’re watching in the year ahead.

Long-term trends in private credit

1. The intersection of public and private markets 

The lines between public and private markets are blurring, and we believe this trend could create greater opportunities. We see this convergence occurring both from companies/issuers as well as investment allocators seeking more integrated solutions. 

In our view, the attractiveness of private credit is rooted in its flexible structuring. The asset class offers borrowers the opportunity to tailor their financing structures over a longer time horizon, outside of the volatility experienced in public markets. An area where we continue to see this dynamic is with venture-backed, high-growth companies that are choosing to stay private for longer, creating funding needs that are being addressed with solutions across the capital stack. In fact, the average age at which venture capital-backed companies go public grew from about 3.5 years during the 1990s to more than 5 years today.¹ They seem to increasingly prefer to go through the hyper-growth phase as private companies in part because they can better align their long-term goals outside of the quarterly earnings cadence of public markets. We continue to see these companies expanding their financing tool kit to include less structured solutions, such as less dilutive debt with equity upside. 

Another area where the convergence of public and private credit appears to remain pronounced is within broadly syndicated loans (BSL) and middle-market direct lending (MMDL). Notably, these markets have a significant overlap and function in capital markets. A tug of war on demand for loans seems to have emerged across the two spaces, with deal flow alternating depending on the most favorable terms. As a result, CLO equity could potentially be a significant beneficiary of the growth in private credit. For example, we believe the continued demand for MMDL is a positive for CLO equity investors, as it appears to have reduced the number of distressed credits in the market as private credit has refinanced a number of these names out of CLOs at par.

From an allocator standpoint, investors seem to be looking to diversify their public-market exposures and capture illiquidity/complexity premia in the private credit markets. This includes what appears to be increased demand from high-net-worth and retail investors. For instance, interval funds (closed-end mutual funds that offer investors limited liquidity at “intervals,” which structurally fit private markets’ inherent illiquidity) have seen their assets grow roughly 40% per annum for the last 10 years.² In response to this growing demand, managers have sought to design solutions that allocate across the breadth of credit markets in both public and private assets.

2. AI and private credit: Data storage, real estate, and infrastructure

As the AI theme makes its way through markets, the need for data storage to deal with the growing compute demands of AI use cases will inevitably go up, in our view. This could have a direct impact on markets from both an equity and lender perspective. There will likely be increased demand for different capital solutions to support the ongoing breakthroughs in AI. We believe private debt will likely be a key way to fund this continued growth, by not only funding the innovative growth companies pioneering new AI technologies but also by providing capital to develop infrastructure for data centers, expand the electric grid, and build new energy capacity, among many other use cases. This capital-intensive transition will require an ability to underwrite asset-backed loans, projects, and real estate, in addition to high-quality utilities and tenants. As a result, the AI theme may contribute to accelerating growth in diverse areas of private credit including infrastructure, real estate, venture/growth lending, and investment-grade debt. 

For more on the impact of AI in private markets, read our venture capital outlook.

3. The evolving role of banks in the lending market

Disintermediation has been a long-standing trend in credit markets as banks have had to reshape their balance sheets due to tighter regulations. However, the role of banks in the credit market remains essential and has simply evolved over the last few years, with further evolution expected in the future. Banks have become major partners to market-based lenders and have significantly contributed to the growth of private credit. These partnerships take various forms, including providing financing to market-based lenders, distributing private credit products to their clients, and leveraging their specialized origination and risk-management expertise in certain asset classes. 

We believe that banks will continue to be a pivotal part of the credit markets and will play a crucial role in the ongoing success and growth of private credit.

Private credit’s short-term cyclical trends 

4. Higher for longer interest rates

Today’s heightened interest-rate regime will likely put increased stress on lower-quality credits by further limiting their free cash flows. However, investors focused on high-quality, fixed-rate assets or sectors with a low correlation to interest-rate movements may do well in this environment. For example, investment-grade sectors like private placement debt tend to be more insulated from negative credit events due to higher interest rates, given their higher quality starting point. This sector is also primarily composed of fixed rate securities, enabling lenders to lock in higher yields for the duration of the loan without taking incremental credit risk. In addition, private credit sectors with spreads that have not historically been tied to interest-rate movements, like venture/growth lending, may also benefit from higher base rates in a higher interest-rate environment. 

Critically, we continue to think security selection will remain key, regardless of the rate environment. Investors with the ability to avoid weaker credits through deep credit underwriting and enhanced structuring could be well-positioned in this new regime. 

5. The importance of financial covenants

The significant growth in the private credit market, particularly within the middle-market direct lending space, has some market participants raising the importance of strong financial covenants in today’s environment. While there are early signs that defaults may be rising in the below-investment-grade private credit market, defaults are still only at 2.71% and we have yet to see evidence of increasing defaults in other parts of private credit.³

Financial covenants — and, in particular, having the right covenants for a specific sector of the private credit market — can add value in an uncertain market. For example, fixed rate debt can include prepayment protections, like make-whole payments, which help lenders lock in the benefit of lending at today’s higher rates, even if borrowers choose to refinance in the future. In parts of the private credit market that extend floating rate debt, it can be more important to include financial covenants that can bring the lender and the borrower to the table before a default to renegotiate the terms of the loan and improve the lender’s credit position.

Bottom line on the outlook for private credit

As we head into 2025, we believe private credit will continue to build on this year’s momentum. Crucially, as the asset class grows, it appears to be broadening its scope, with new areas of growth emerging based on structural and near-term trends. In our view, this makes it critical for investors to have a holistic view of the opportunity set, deep credit underwriting capabilities, robust resources, and the long-term relationships to navigate the opportunities and risks this market presents.

Our capabilities

¹ PitchBook, data as of 31 December 2022. | ² Morningstar Direct, fund company filings. Data as of 31 May 2024. | ³ Proskauer, Private Credit Default Index, 30 June 2024.