Private credit has delivered steady, equity-like returns for two decades, propelling its growth to a USD 1.6trillion asset class—now rivaling the U.S. high-yield bond market. However, its track record is relatively short. During the Great Recession, it was a niche strategy and a fraction of its current size. Now, with economic growth showing signs of slowing and tariffs emerging as a challenge to some borrowers, investors are asking whether the next true test is approaching.

What is private credit and how has it grown?

Private credit is lending arranged privately between a company and a non-bank lender, most often in the form of direct lending to finance a private equity buyout or a follow-on acquisition. The loans are typically senior-secured and floating rate, and they are held to maturity by a private credit fund, rather than being traded on exchanges like public bonds.

Post-2008 regulations like Basel III and Dodd-Frank limited the ability of banks to lend to certain borrowers. With traditional lenders constrained, private equity acquirers still needed debt to close deals and private lending filled the gap.

From the perspective of investors, private credit offers a relatively high and regular cash flow yield, and a premium to publicly traded fixed income. When interest rates were very low during the 2010s, this premium made the asset class particularly attractive. With interest rates having risen since 2022, the appetite for private credit has not abated as it has continued to offer a 200-300 basis points (bps) yield premium above high-yield bonds.

A new growth area within private credit is the secondaries market. Private credit secondaries involves the acquisition of existing interests held by private credit funds. The incentive for investors in the secondary market comes from accessing mature portfolios or individual loans with established cash flows. An additional premium may be earned as purchases are negotiated with discounts to net asset values, as sellers may have specific reasons for selling to address cash flow pressures or reallocation needs. 

By purchasing seasoned assets, investors can benefit from immediate yield generation and reduced exposure to market volatility at a discounted price, given the imbalance between supply and demand. 

Despite secondaries being only a fraction of the total private credit market, the unique benefits that secondaries bring has led to a substantial growth in this market segment, particularly through the Covid period, with estimated deal flow in 2024 at over USD 30billion.

What are some risks to private credit today?

Like any kind of lending, returns from private credit ultimately depend on borrowers repaying their loans.

Headline default rates today are low (Exhibit 1), though deeper analysis of credit metrics is often needed to evaluate stress in portfolios.

There are a number of specific risks that investors should be mindful of, should we enter a more challenging economic environment.

• Tariffs: Shocks to corporate profits from tariffs could put pressure on borrowers exposed to international trade. Maintaining a diversified exposure to private credit is important to avoid concentrated risks.
• Higher interest rates: Higher rates can be attractive to investors, but it is a two-sided coin; they also translate into higher interest payments for the borrowers which makes it more challenging to keep up with their repayments. Persistent inflation and a stable job market may lead the Federal Reserve to slow the expected pace of rate cuts. Diligence of underlying portfolios is important to ensure borrowers are not over-leveraged.
• Lower returns: Continued economic uncertainty and a pause on deal-making could make it more challenging for private credit funds to put money to work and generate the high returns investors have come to value. Investing in secondaries strategies can mitigate this risk, as they are already deployed and generating yield. 

Investment implications

Private credit structures are built for resilience and flexibility, enabling lenders to renegotiate terms with borrowers during challenges. However, manager selection is vital in private credit, as skilled managers ensure strong underwriting standards and can effectively leverage these structures to protect investments.

We expect to see continued investor demand for private credit over 2025. While policy rate adjustments in either direction could mean higher yields for investors or lower interest for borrowers, we believe that private credit offers very attractive risk-adjusted returns, especially relative to liquid credit and high-yield alternatives.

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