Private Credit 2025

Navigating Opportunities and Challenges in the Global Private Credit Market

The private credit market has emerged as a formidable force in the global financial landscape, offering a compelling alternative to traditional syndicated bank lending. The Private Credit Guide provides a broad overview of trends and developments in the private credit market in the most active jurisdictions around the world, including the US, the UK and beyond, and a detailed look at the full life cycle of a private credit transaction.

A Global Perspective on Private Credit

Private credit, characterised by non-bank lending to public and private companies, has grown exponentially over the last decade. This expansion is driven by a confluence of factors, including regulatory changes, investors searching for better terms and higher yields and the increasing sophistication of private credit providers. As of 2024, the global private credit market is valued at approximately USD1.8 trillion, with projections suggesting it could more than double in the coming decade.

The market’s growth is not confined to any single region but is instead a global phenomenon. In the United States, private credit has become a cornerstone of corporate finance, offering flexible and tailored solutions to borrowers. In the UK and Europe, the market is gaining traction as companies seek alternatives to traditional bank financing amidst a challenging regulatory environment. In Asia and Latin America, where the market remains dominated by traditional bank lending, we have nevertheless seen steady growth in the private credit market. Meanwhile, in emerging markets, private credit is playing a pivotal role in bridging the financing gap for mid-sized enterprises. We see this global trend continuing as established asset managers seek increased opportunities in emerging markets, and as the best asset managers continue to outperform on their fundraising targets.

Key Themes and Trends

Several themes and trends that are both influencing market dynamics and are a result of market dynamics have emerged.

Market consolidation and strategic partnerships

The private credit market is witnessing a wave of consolidation, with larger firms acquiring smaller players to enhance their market presence. For instance, BlackRock’s USD12 billion acquisition of HPS and Clearlake’s purchase of MV Credit are indicative of this trend. Additionally, strategic partnerships between banks and private credit funds are becoming increasingly common, allowing both parties to leverage their respective strengths. Citigroup’s USD25 billion partnership with Apollo and Wells Fargo’s USD5 billion collaboration with Centerbridge Partners exemplify this “co-opetition” model, which enables banks to offload risk while maintaining client relationships and provides private credit funds with access to a broader range of investment opportunities.

Regulatory developments

As the private credit market matures, it faces increased scrutiny from regulators. In the United States, the Securities and Exchange Commission (SEC) and other regulatory bodies have expressed concerns about the lack of transparency in private credit valuations and potential systemic risks. In Europe, the European Central Bank (ECB) has been proactive in seeking more information on private credit exposures from banks. These regulatory developments underscore the need for private credit providers to enhance their compliance and reporting frameworks to mitigate potential risks.

Innovative financing structures

Private credit providers are continually innovating to meet the evolving needs of borrowers. Hybrid capital solutions, which blend debt and equity elements, have gained traction as a versatile tool for optimising capital structures. These instruments allow firms to manage costs effectively and meet regulatory requirements without over-leveraging. Additionally, liability management transactions are becoming more prevalent, offering both challenges and opportunities for lenders and borrowers. The increased use of payment in kind (PIK) interest, for example, allows borrowers to conserve cash by paying interest in-kind, although it also raises concerns about masking underlying financial issues.

Liability management

Liability management transactions have recently become a focal point in the private credit market, with high-profile and widely publicised transactions capturing the attention of general partners and investors alike. These transactions, which involve restructuring a company’s debt obligations, offer both risks and rewards. On the one hand, they can provide companies with the flexibility to manage their capital structures more effectively, potentially avoiding defaults and preserving value, and often creating option value for shareholders. On the other hand, they can lead to complex negotiations and potential conflicts between debtors and creditors and among creditors. The recent Serta decision in the United States, which involved a controversial liability management transaction, has highlighted the need for private credit providers to navigate these transactions with caution and sophistication.

Junior capital

Junior capital provided by private credit and structured equity funds has emerged as a crucial financing tool for private equity firms and non-sponsored companies for a variety of uses. Private credit providers are increasingly offering junior and hybrid capital solutions that blend debt and equity elements, enabling sponsors to monetise assets effectively, de-lever debt capital structures and provide more dry powder for acquisitions. These solutions often involve preferred equity, which positions itself higher in the capital structure than common equity held by private equity sponsors but remains junior to existing creditors. These deals frequently utilise PIK structures, allowing interest payments to be deferred, thereby alleviating immediate cash flow pressures.

UK-specific trends and developments

The UK private credit market is experiencing its own set of trends and developments. The market has been buoyed by a favourable regulatory environment, with the Financial Conduct Authority (FCA) taking a proactive approach to fostering innovation and competition. Additionally, the UK’s exit from the EU has created both challenges and opportunities for private credit providers. On the one hand, the uncertainty surrounding Brexit has led to increased caution among investors.

On the other hand, asset managers have expanded their fundraising efforts by opening fund investment opportunities to high net worth individuals and family offices. This has permitted certain private credit funds to offer businesses a lower cost of capital, increasing the fund’s assets under management and maximising the deployment opportunity. Private credit providers are also seizing new opportunities to fill the financing gap left by traditional banks. Additionally, the UK’s focus on sustainable finance and ESG considerations is also shaping the private credit landscape, with an increasing number of private credit funds incorporating ESG criteria into their investment strategies.

Terms, covenants and documentation

Initially, the growth of private credit deals was mainly driven by the tighter terms, covenants and documentation that govern these transactions. Investors sought to either drive terms that were creditor-friendly or have influence in any given credit by holding positions that were far larger than traditional holds of institutional investors in collateralised loan obligation (CLO) driven broadly syndicated deals. As the market has evolved and matured, these terms have seen a loosening in the market as a result of the expansion of the private credit market and the increased competition brought on by new market entrants.

That said, private credit agreements often continue to feature bespoke terms tailored to the specific needs of the borrower and the risk appetite of the lender. Documentation in private credit deals is becoming increasingly sophisticated, reflecting the complexity of the transactions and the need for clarity and precision.

The rise of covenant-lite or covenant-loose structures, which feature fewer financial maintenance requirements on borrowers, has been a notable trend, particularly in larger deals. However, this has also led to increased scrutiny from investors and regulators, who are concerned about the potential for weakened lender protections. As a result, the most sophisticated and established private credit providers are continuing to place greater emphasis on the quality and tightness of underwriting and documentation. The most sophisticated and established private credit shops are also focused on going back to basics with sole underwriters or tighter club deals remaining a focus and preference over larger, more aggressive deals that resemble broadly syndicated deals.

The rise of asset management M&A and other asset classes

The private credit market is not only expanding in terms of volume but also in the diversity of asset classes it finances. One of the most significant trends in recent years has been the rise of asset management mergers and acquisitions (M&A), driven by the need for scale and diversification. Asset managers are increasingly turning to private credit to finance these transactions, leveraging its flexibility and speed of execution. This trend is exemplified by high-profile deals such as BlackRock’s acquisition of HPS and Clearlake’s purchase of MV Credit, which highlight the strategic importance of private credit in facilitating growth and consolidation in the asset management industry.

Beyond traditional sponsor finance and corporate borrower transactions, private credit is also being used to finance a wide range of other asset classes, from real estate and infrastructure to technology and healthcare. In the real estate sector, private credit is playing a crucial role in financing development projects and acquisitions, particularly in the face of tightening bank lending standards.

In infrastructure, private credit is being used to fund large-scale projects, such as renewable energy developments, that require significant capital investment. The technology sector, with its rapid pace of innovation and growth, is also a key area of focus for private credit providers, who are keen to support companies with scalable business models and strong growth potential. Private credit asset-backed loans are also a developing sub-asset class, and yet another example of the expanding aperture of the private credit offering.

Conclusion

As we explore the rapidly expanding private credit market and map the contours of the current landscape, we urge readers to think expansively about how it can generate value for sponsors, debtors and creditors. We hope that this first edition can help market participants better navigate the opportunities and challenges that lie ahead.