The private credit market has ballooned over recent years. Morgan Stanley calculated its size in 2025 at $3trn compared to about $2trn in 2020 and estimated it to grow to approximately $5trn by 2029. [1] And as that is based on lending by non- bank institutions, without including high net worths and non- institutional lenders, it could be an understatement.
In a world of uncertain equity returns and high business risks, the draw is obvious. Private credit offers investors a combination of (a) apparent safety- ranking above equity in an insolvency (and above unsecured debt for those loans with security), along with (b) strong financial returns. This seems an ideal haven for many investors in a stormy world.
There is also an obvious demand from business. While much of the focus in the press has been on the US market, in the UK, the need for private finance is all too apparent. Managers of SME businesses will be very much aware that the traditional clearing banks (NatWest, Lloyds, Barclays and HSBC) have shown less interest in lending to their tier of business since the financial crisis of the late noughties and that the big banks seem to lack the agility needed for a fast-evolving business environment, the development of new business sectors and new ownership structures. If business is to thrive, adequate and adaptable finance is needed.
Faced with this pressure of demand from business and the weight of capital looking for strong (and hopefully safe) returns, the growth of private capital may seem inevitable. However, it may not look like a smooth and steady increase. As Jim Zelter of Apollo (who have made a major commitment to the private credit market) commented “This feels like it is buying beachfront property in the Hamptons 40 years ago. If you were there early, that was pretty." [2]
So, are we witnessing a disorganised rush by funders to grab credit deals with risky profiles? And if we are, is that a problem?
JP Morgan boss, Jamie Dimon clearly thinks it is, having famously compared some private credit providers to cockroaches in the shadow banking sector. He makes clear that he sees this as a growing problem, quipping “when you see one cockroach, there’s probably more.” [3]He is not alone. Many industry pundits have forecast a fast rise in defaults amongst private credit deals.[4] High profile collapses can heighten that concern. The recent collapse of UK bridge lender Market Financial Solutions, itself funded by institutional and non-institutional private credit, certainly caused some jitters in the UK market.
But not everyone sees it like that. Major fund managers have committed vast sums to this market and see it as huge growth area to which they continue to be committed, despite the talk of risk.
So, will high-risk businesses be flooded with loose capital to create a widespread and systemic risk of business and even market, failures? Or will we see a healthy new source of finance boost businesses and investors alike?
Part of the problem in answering this question is the vast diversity of lenders and assets which fall within the scope of what most people mean by “private credit”. It includes highly professional institutional funds, wealthy families, entrepreneurial investors and others. With this range of lenders, there are bound to be different approaches and with that, bringing a range of defaults. Defaults have to be a feature of any lending market. That risk will be increased with a weight of capital chasing with what seems to be the more attractive deals, leading to sloppy documentation and incomplete risk analysis.
The world’s geo-political situation also plays a part as management consultants describe some organisations and situations as “VUCA” – volatile, uncertain, complex and ambiguous, a term which could not be more appropriate for the current world environment. In that environment, some businesses will unfortunately fail. But it’s not yet clear whether defaults in the private credit sector are at a very different level to those in traditional banking or listed bond markets. Is the talk about systemic risk flowing from private credit just fear mongering from the traditional lending sector?
The trick is to balance the opportunities with a sober assessment of risk. It is no more inevitable that private credit deals lead to defaults or that individual funders lose their shirts, than it is in the traditional banking sector. But the number of players and range of opportunities in private credit makes for fragmentation and unpredictability.
The dynamism of lenders freed from the constraints of the regulated bank or quoted bond environment, and the healthy returns offered to investors in the private credit market, are both clearly needed. But this must be tempered with caution. Due diligence and proper documentation are essential for the funds to continue to flow for the benefit of both investors and business borrowers in a sustainable way.
[1] Morgan Stanley - Private Credit Outlook: Estimated $5 Trillion Market by 2029 | Morgan Stanley
[2] Private Markets Insights - Apollo's Zelter Sees Historic Private Credit Expansion Ahead
[3] The Guardian - JP Morgan boss says more ‘cockroaches’ will emerge after private credit sector failures | JP Morgan | The Guardian
[4] Financial Times - Partners Group sounds alarm on private credit default rates
