Amid a cacophony of middle-market-lending headlines, the vast expanse of private credit — spanning a multi-trillion-dollar universe¹ — remains rich with a broad range of sub-asset classes that, in our view, can potentially harbor distinct pockets of opportunities. 

It’s true that the US$767 billion direct lending universe² has seen a massive influx of capital, raising worries that a crowded and competitive space may drive down the quality of loans and potentially lead to a rise in defaults. But this is only the tip of the private credit iceberg, with numerous other areas with differing underlying dynamics, including investment-grade private placement, growth lending, infrastructure debt, specialty lending, asset-backed financing, and many more. 

In our view, the recent negative media coverage of one segment of private credit may be myopic. We think it’s essential to step back and assess where enduring attributes are combining with current trends to fuel compelling opportunity sets. 

Four key trends in private credit

Private credit more broadly is, in our view, supported by four overarching themes that are driving potential market opportunities in numerous sub-asset classes. 

• The disintermediation of lending — Traditional lenders in many asset classes are generally stepping back from the market. This disintermediation theme accelerated after the global financial crisis (with the Basel III and Dodd-Frank regulations) and has been reinvigorated with the collapse of Silicon Valley Bank and failures of regional banks. These recent shocks could lead to higher regulatory constraints once again, elevating operating and capital costs for banks. The resulting uncertainty has led to observable lending gaps in markets, which are increasingly being filled by nonbank lenders. For example, the investment-grade private placement market is offering solutions for investment-grade borrowers that historically may not have accessed the private markets. Regional banks’ recent challenges may likewise allow the commercial real estate private credit market to take advantage of latent opportunities. Finally, growth lending managers are looking to capitalize on the void SVB left in the venture lending market. Across the private markets, disintermediation could create opportunities for specialized and seasoned investors to fill lending gaps, particularly as there is generally lower competition for deals in many markets relative to middle-market direct lending.

• The convergence of public and private markets — The rapid growth of private credit has led to a notable convergence of public and private markets. As the asset class evolves, it is demonstrating its ability to provide differentiated solutions to companies that traditionally accessed banks or public markets. Borrowers may see that the private markets can offer greater certainty on deal closure, more financing options, the ability to work with fewer lenders, and more efficient loan restructuring when necessary. This blend of bespoke terms and ongoing opportunity is allowing private credit to compete head on with numerous liquid markets. For instance, bank participation in the leveraged loan market has shown a declining trend since the 2000s⁴ and, in their place, private funds are now able to deploy large amounts of capital to fund deals. On the venture side, we are seeing companies staying private for longer, with the mean years to exit of VC-backed companies increasing by 60% in the last 20 years.⁵ In contrast, the capital demand/supply ratio in growth lending is at a decade-plus high of 2.2x.⁶ This is supported by private lenders’ ability to provide capital to high-quality companies in a way that can avoid forcing a share price reset or generating meaningful dilution.  
• Structurally higher rates — Higher interest rates offer private credit investors two sides of the same coin. On one side, lenders have the opportunity to lock in higher yields without taking incremental credit risk (for fixed-rate securities) or posting record income (on floating-rate securities). On the other side, in areas with higher-risk assets, elevated interest rates could be a source of credit stress for borrowers over time, which could lead to deterioration in quality. Given this risk in certain private credit sectors, we think it is crucial for investors to have deep credit analysis and underwriting capabilities. As we saw with crossover funds in the private equity market, it’s possible that defaults will flush out "tourist managers" from private credit.
• Durable barriers to entry — As assets move into middle-market lending, other areas of the market may have higher barriers to entry, in our view. In the investment-grade private placement market, for example, we believe there is enhanced access to the best deals for investors with deep relationships in the ecosystem. We think these relationships take decades of being in this evolving market to build. In our view, this experience is critical to accessing the full breadth of the US$70+ billion syndicated market and broadening the funnel to include growing issuance from direct origination and club deals.⁷ Moreover, areas such as this generally have a high structuring component, bespoke negotiations, and higher touch, which we think require robust credit underwriting experience and networks. We believe sub-asset classes with high barriers to entry could be more persistent beneficiaries of private credit’s tailwinds.

Outlook for private credit

The private credit market is diverse and dynamic. Certain segments of the asset class are witnessing an increasingly competitive landscape, influenced by capital inflows. But other sub-asset classes could see enduring attributes combine with recent trends to create pockets of opportunity for discerning investors. 

In our view, it is crucial for asset owners to find partners with deep resources and expertise across industries, asset types, and regions to source opportunities and dig into risks. In particular, we believe broad deal access built through long-tenured relationships alongside experienced credit analysis and underwriting will be increasingly critical going forward.

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