What might private credit hold in store for investors in 2024?

This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.

All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

• The private credit market has grown rapidly since the global financial crisis, driven by strong demand from borrowers and investors seeking higher yields. With bank lending in decline in response to tighter regulations, private lenders are taking an increasing share of loan issuance.
• These favourable supply-demand dynamics are set to continue, given the ‘maturity wall’ of leveraged loans and high-yield bonds due for repayment within the next three to five years, as well as record levels of private equity ‘dry powder’.
• Sustained higher interest rates and a slower economic backdrop could put pressure on some borrowers, so careful due diligence, deal structuring and underwriting will be increasingly important.
• For investors willing to accept more risks and commit for the long term, private credit offers a range of opportunities across the market cycle and the potential for attractive, risk-adjusted portfolio returns.

The private credit market has grown rapidly over the past decade or so, with assets under management (AUM) rising from $272 billion in 2007 to $1.6 trillion in 2023 (see chart), according to researcher PitchBook¹. This trend is expected to continue at pace, with Preqin forecasting that private credit assets under management will nearly double in size to $2.8 billion, by the end of 2028². Once a relatively niche asset class, it now represents 12% of the global alternatives market³ – and accordingly is becoming an increasing feature of investors’ private assets portfolio allocations.  

Soaring value of private credit

Growth in private credit assets under management since 2006

For much of the 20th century, lending to small- and medium-sized businesses was done almost exclusively by banks. This changed in the 2000s, especially in the aftermath of the global financial crisis (GFC), when banks significantly scaled back new and existing loans, in response to tighter regulations around capital requirements.

As the supply of financing from banks has declined, private lenders have stepped in to fill the gap (see chart). In the US, for example, private credit captured 84% of middle-market leveraged buyout (LBO) loans in the first three quarters of 2023⁴.

Share of US middle-market LBO loan issuance, by debt type

As banks have retreated from leveraged buyout (LBO) loan issuance, direct lenders, such as private credit firms, have stepped into the breach

Investor demand has also been a key driver of growth. With interest rates close to zero for more than a decade, investors have increasingly turned to private credit for additional yield. Private credit typically offers floating rates, which act as a de-facto hedge against rising interest rates. As central banks have hiked interest rates rapidly since 2022, floating-rate debt has offered investors valuable protection against inflation. 

A refresher on private credit

Private credit can provide a vital source of capital for borrowers unable to secure traditional bank lending. As terms are negotiated directly between borrower and lender, private credit offers borrowers more flexible solutions, which can be tailored to suit specific requirements, as well as greater certainty on pricing and execution compared to public markets. Private credit loans are similar to any other debt, whereby the borrower receives financing and, in return, the lender earns interest payments.

For investors, private credit offers a yield premium over public fixed income, often referred as an ‘illiquidity premium’, which is driven by the complexity associated with providing private loans. As with private assets more broadly, private credit tends to have a lower correlation to public markets, so it can improve risk-adjusted returns when included in a traditional equity-bond portfolio. 

Most debt is held to maturity, or refinanced, and with no daily pricing, returns are less volatile and driven by credit fundamentals, rather than market sentiment. However, the trade-offs include a lack of liquidity, as well as potentially higher credit and idiosyncratic risks, meaning it’s only suitable for more experienced investors. 

Supportive supply-demand dynamics

The current regulatory environment offers limited incentives for banks to extend their loan books. The final phase of Basel III – the internationally agreed banking standards developed post-the GFC – is due to be implemented in 2025 and includes tighter rules on banks’ capital requirements in relation to riskier assets. This is likely to drive further retrenchment in bank lending and create more opportunities for private credit – not only for new financing, but also where banks may look to offload existing loans from their balance sheets.   

There is also a so-called ‘maturity wall’ of leveraged loans and high-yield bonds issued at near-zero rates that are approaching their repayment dates (see chart). More than $2 trillion of US high-yield bonds and leveraged loans are due to mature in the next five years, and almost 25% of the high yield market will mature within three years⁵. Given the incoming banking regulations, these issuers are increasingly likely to turn to private credit for refinancing. 

The upcoming maturity wall

Leveraged loans and high yield debt that has been refinanced or is approaching its repayment date 

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