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The private credit market has grown significantly, becoming a key component of the global financial landscape. Traditional banks have tightened lending practices due to increased regulatory scrutiny and risk aversion following the 2008 Global Financial Crisis. In response, private credit has emerged as an alternative for businesses facing challenges in securing financing from traditional sources.

This blog explores the factors driving private credit’s rise and how it compares to public debt and traditional financing.

A Multi-Layered and Growing Market

Several factors have fueled private credit’s expansion, including institutional investors’ pursuit of yield, increased market sophistication and greater awareness of the segment’s unique characteristics.

Private credit includes diverse debt strategies, such as senior debt, subordinated capital and credit opportunities. Senior debt funds offer secured loans for acquisitions and restructurings, benefiting from priority claims on assets. Subordinated capital (mezzanine funds) sits between equity and secured debt, often financing buyouts while generating interest payments. Credit opportunity funds invest in various credit instruments across global markets, including distressed debt and structured finance, providing potential for diversification.

Private Credit vs. Public Debt: Liquidity and Accessibility

Private credit and public debt differ in liquidity and market accessibility. Private credit refers to debt investments that are not publicly traded and typically issued by non-bank lenders. These instruments are often illiquid, with lock-up periods restricting sales. However, this illiquidity may result in higher yields compared to public debt.

Public debt, including corporate bonds and government securities, trades in the public bond market, offering greater liquidity with expanded access for prospective buyers or sellers. This accessibility allows individual and institutional investors to easily participate. However, increased competition often results in lower yields.

For investors, the liquidity tradeoff is crucial. Private credit’s illiquidity requires a longer investment horizon, whereas public debt’s liquidity provides flexibility but potentially lower yields than can be found in private debt markets.

Transparency and Reporting Standards in Private vs. Public

A key distinction between private credit and public debt is transparency. Public debt is subject to strict regulatory requirements, including standardized disclosures and regular reporting. This enables investors to make informed decisions based on widely available financial data.

Private credit, however, lacks uniform reporting standards. Borrowers are not always required to disclose financial information publicly, and reporting practices vary across issuers. This opacity makes due diligence and fund manager expertise critical in assessing credit risk.

To mitigate transparency challenges, private credit lenders rely on strong borrower relationships, detailed covenants and negotiated reporting requirements. Even so, investors must be comfortable with less readily available information, making trust in their fund managers essential.

Private Credit: Filling the Gaps Left by Banks

The lending landscape has evolved since the 2008 financial crisis. Traditional banks—once primary credit providers—face stricter regulations, limiting their ability to lend, particularly to middle-market businesses and specialized sectors. Higher capital requirements and risk management constraints have reduced their exposure to certain loan types.

Private credit lenders have stepped in, offering capital alternatives to businesses that may not meet traditional lending criteria. These non-bank lenders provide financing solutions with greater flexibility, including tailored repayment schedules, customized covenants, and the ability to underwrite complex transactions.

By serving businesses overlooked by traditional banks, private credit supports economic growth, particularly among small- and medium-sized enterprises (SMEs), which are widely viewed as key contributors to innovation and employment.

Synergies Between Private Credit and Traditional Lending

While private credit and bank lending are often seen as competitors, they also complement each other. Banks may originate loans and syndicate portions to private credit funds, managing risk while continuing to serve clients.

Additionally, banks and private credit firms may co-lend on larger transactions, combining resources and expertise. Such partnerships allow banks to remain engaged in lending while meeting regulatory requirements, while private credit firms gain access to larger, more complex deals.

Learn more in our recent analysis, “The Rapid Rise of Private Credit.”

Don’t miss our next blog where we explore the opportunities and risks associated with private credit.

This blog was co-authored by Ricky LaBelle and Greg Vadala.

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