Private Credit: Further confirmation of its staying power

Key takeaways

• As the private credit market has grown into a sizable, scalable, stand-alone asset class, it has broadened its addressable markets of investors and borrowers. This has meant that private credit is no longer reserved for niche financing solutions, or exclusively for lending to smaller, middle-market corporate borrowers. Rather, it now reaches areas it previously did not. We also believe the definition of ‘private credit’ has broadened in recent years, to essentially include any financing that is originated, structured, and held directly by a lender. As private credit has grown, its addressable market of borrowers is increasingly overlapping with two distinct financing areas historically serviced by banks: (1) for smaller borrowers: commercial & industrial (C&I) loans, and (2) for larger borrowers: syndicated corporate credit markets (leveraged loans, HY bonds, and even IG bonds).
• A wide range of global banks have recently announced plans to participate more actively in the private credit market. We have identified four general types of activity: (1) using balance sheet capital to make direct loans; (2) announcing origination partnerships with private credit lenders; (3) extending private credit loans through in-house asset management arms (using LP/investor capital); and (4) sales of loan blocks to private credit lenders. Some banks have also highlighted their role in providing fund financing services to private credit lenders – further underscoring their desire to participate in the growth of this asset class, even if somewhat ‘indirectly’. On net, we expect these various forms of partnership to result in broader choice (across a range of market conditions) for borrowers.
• We believe these developments provide further confirmation of private credit’s ‘staying power’ as a viable funding option for a wide range of companies, in a variety of market conditions. We expect this will drive additional expansion of private credit’s addressable market and see high-level benefits across banks (client retention, product capabilities), private credit lenders (origination, market expansion), and the financial system (broadening customized and efficient financing access for a range of borrowers).
• Going forward, we expect banks will increasingly seek to offer a holistic financing solution to clients, with a product-agnostic approach. Such a client-tailored tool kit will likely have three elements, in our view: (1) C&I lending; (2) syndicated financing; and (3) private credit financing to a range borrowers (sponsored and non-sponsored) across various strategies (senior direct lending, junior capital, and asset-based lending, among others).