The Rise of Private Credit: Is it Reshaping Corporate Lending in the US, UK, and Europe?

Introduction:

In the past decade, private credit has evolved from a niche financing option into a significant force in global lending. Once dominated by banks and public bond markets, corporate borrowing is increasingly supplied by private funds outside the traditional banking system. The numbers tell the story: by 2023, the private credit market had swelled to roughly $1.5–$1.7 trillion in assets under management, rivalling the size of the high-yield bond and leveraged loan markets. [1] [2] Industry forecasts only point upward – some analyses project that global private credit could double in size again by the late 2020s. [3]

This boom is not confined to the United States; similar trends are playing out across the UK and continental Europe as borrowers and investors alike flock to private debt. Below, we explore what private credit is, what’s driving its explosive growth, how it compares to traditional finance, and the implications – including the risks and opportunities – that come with this transformation in corporate lending.

What Exactly is Private Credit?

Private credit (also known as private debt) refers to loans and other debt financing provided by non-bank lenders on a privately negotiated basis, rather than through public markets or traditional bank loans. [4]

In practical terms, this means an investment firm (such as a credit fund, a private equity firm’s credit arm, or a business development company) directly lends money to a business borrower, often tailoring the loan’s terms to the borrower’s specific needs. Unlike a bank loan, these lenders are not depository institutions and are less constrained by banking regulations. And unlike public debt (such as corporate bonds or syndicated loans), private credit instruments are not issued or traded on public exchanges. They are typically illiquid loans held until maturity, without a liquid secondary market. [5]

How is Private Credit Different?

This setup gives private credit some unique characteristics. Because deals are struck bilaterally (or in small club groups of lenders), terms can be highly bespoke and flexible, in contrast to the relatively standardised covenants in broadly syndicated loans or bonds. For example, private loans often include features rarely seen in bank loans – such as equity kickers (equity warrants for the lender), higher prepayment penalties, or even giving the lender an observer role in the company’s governance. [6]

The creditor relationship tends to be closer and more hands-on. A borrower might prefer private credit if it wants to avoid the disclosure, credit-rating requirements, and multiple creditor coordination that come with public debt issuance. In exchange for this convenience and customisation, the cost of capital is usually higher than in the public markets. [7]

A Boom Fueled by Post-2008 Shifts:

The rise of private credit is deeply rooted in the aftermath of the 2008 Global Financial Crisis. As banks recovered from the crisis, regulators imposed stricter capital and lending standards (such as the Basel III rules), which made it more costly for banks to hold riskier corporate loans on their balance sheets. [8]

Banks, especially in Europe and the U.S., have pulled back from certain types of business lending – notably leveraged loans to mid-sized companies and lower-rated borrowers – to meet higher capital requirements and other regulatory constraints. This retrenchment by traditional lenders opened a void in the market that private credit funds were eager to fill. [9] In essence, non-bank lenders stepped in where banks stepped out, providing financing to companies that might have previously relied on commercial banks or public markets.

Low interest rates and investors’ “hunt for yield” further turbocharged the trend. [10] In the decade after 2008, interest rates hovered near historic lows in the U.S., UK, and Europe, and yield-starved institutional investors (pension funds, insurers, endowments, etc.) looked beyond traditional bonds to earn better returns. Private credit offered an attractive proposition: significantly higher yields than comparably rated public debt, in exchange for liquidity risk. Investors were willing to lock up capital in closed-end private debt funds for 5-10 years, drawn by the illiquidity premium that private loans could earn. Borrowers, for their part, became willing to pay that premium because private credit promised speed and certainty of execution.

So, What are the Growth Figures?

The growth of private credit has been nothing short of meteoric. Two decades ago, this market barely registered – for instance, in the U.S., it stood at just a few tens of billions of dollars in the early 2000s. [11] After 2008, it began a steady climb, and then accelerated rapidly in the last several years.

PitchBook and Preqin, which track private capital markets, estimate the global private credit asset pool at around $1.5–$1.7 trillion as of 2023. [12] To put that in perspective, that’s on par with the entire U.S. leveraged loan market (~$1.3–$1.4 trillion) and the U.S. high-yield corporate bond market (~$1.3 trillion) [13] – asset classes that have existed for much longer. Direct lending (the most significant subset of private credit) makes up roughly half of that total, with about $800 billion outstanding by some. [14] Growth shows no sign of slowing: one major investment bank projects private credit could reach $5 trillion by 2029. [15] Even more conservative outlooks predict the market will double by the end of this year. [16]

Risks and Challenges – the Other Side of the Coin:

Despite its attractions, private credit comes with a unique set of risks and concerns – for investors, borrowers, and the financial system as a whole. The very features that make it appealing (illiquidity, less regulation, bespoke terms) can also give rise to hazards:

• Illiquidity and Valuation: Private credit is, by design, an illiquid asset class. Investors committing capital to a private debt fund typically cannot withdraw at will – their money is locked in for the fund’s life (which can be 5-10 years). There is no active secondary market for most loans; one must wait for repayment or find a buyer in a small secondary transfer market. This lack of liquidity means investors face liquidity risk – if circumstances change, they cannot easily liquidate their investments. It also means that the underlying loans are not continuously repriced, like public bonds, making it challenging to assess their current market value.

• Lack of Transparency: By its nature, private lending happens out of the public eye. There is no public prospectus or disclosure requirement for a privately negotiated loan. Financial information about the borrower and the loan terms is typically only shared with the lenders, not the broader market. Policymakers worry that this opacity makes it hard to gauge systemic risks. As U.S. Senator Sherrod Brown put it in late 2023, “private credit funds operate in the shadows … in the absence of sufficient oversight and accountability.” [17]

• Default and Credit Risk: Borrowers in private credit are often below investment-grade credits – for example, middle-market companies with ratings in the single-B or lower range. [18] During good times, default rates in private credit have been low, partly because lenders often exercise tight oversight and intervene early if a company hits trouble (thanks to those maintenance covenants). In fact, as of early 2024, the observed default rate on private credit loans was under 2% (around 1.84% in Q1 2024) – impressively low, and even a tick down from the prior year. [19] However, there are reasons to be cautious about future credit risk. Many private loans were made when interest rates were near zero; now rates are much higher, raising debt service burdens on borrowers. Analysts have warned that a combination of sustained high rates and an economic downturn could push more private credit borrowers into distress.

• Concentration of Players: Another emerging risk is concentration risk among the lenders themselves. The private credit fund universe has expanded, but a few giants are increasingly dominating it. By 2023, the top 10 private credit managers accounted for over 50% of all capital raised globally that year, up from about 35% the year before. [20] The top 50 managers accounted for over 90% of fundraising. [21] This means the market is highly concentrated in a handful of mega-funds (often run by large alternative asset managers). If one of these were to stumble or face a liquidity crunch, the effects could be significant.

• Systemic Risks: A pressing question for regulators is whether the boom in private credit is creating risks for the broader financial system. On one hand, shifting loans off banks’ balance sheets and into private funds can diversify the sources of credit and potentially make the system safer – banks are generally less exposed to those loans and thus to the credit risk. On the other hand, banks are not entirely out of the picture. In reality, banks fund and support the private credit market in various indirect ways. Banks often provide large credit lines and financing to private credit funds or their vehicles (for example, subscription credit facilities that funds use for liquidity or leverage facilities for Business Development Corporations). [22] This means that if private credit loans face problems, banks could still feel the pain indirectly through exposures to those funds. Additionally, because the private and public credit markets are now in direct competition, a shock in one could spill into the other.

How Does Private Credit Impact BigLaw?

This seismic shift in corporate lending has also had a significant impact on the legal industry, particularly for commercial law firms that specialise in advising on financing transactions. In many ways, Big Law had to evolve on the fly as private credit grew from a niche practice into a dominant part of the deal flow. Traditionally, top law firms had dedicated leveraged finance teams essentially serving banks on syndicated loans or high-yield bond underwritings. Those deals, while complex, often followed a predictable pattern and a relatively standardised set of documents (e.g. LSTA or LMA standard loan terms). Private credit changed the game by introducing a plethora of new lenders, bespoke deal terms, and the need for far more custom structuring.

One significant development is that law firms have significantly expanded their private credit practices, sometimes poaching specialist partners from competitors, to meet the growing demand from clients. [23] The private credit boom has effectively forced the largest law firms to bolster their banking & finance teams – which are among their most profitable practices – or risk losing out on a vast volume of deals. [24] Firms such as Latham & Watkins, Paul Hastings, and Kirkland & Ellis have aggressively expanded their dedicated private credit groups. Experience in this area has become a hot commodity, leading to intense competition for legal talent who understand the nuances of direct lending deals. [25] In some cases, firms that were long known for representing banks in syndicated loans had to quickly retool so they could also represent alternative lenders, without conflict, to stay relevant.

The nature of the work has also changed. Deal structuring has become more bespoke and complex, which means more intensive drafting and negotiation for lawyers. Instead of relying on a precedent from the last similar syndicated deal, attorneys often must craft novel provisions or adapt to unique requests from private fund clients.

Another area of growth is fund formation and advisory work related to private credit. Each new private credit fund that launches – and, as noted, there have been hundreds in recent years – requires legal counsel to establish. Law firms with investment fund practices have been busy forming private debt funds, handling everything from fund structuring and regulatory compliance (such as SEC or FCA registration) to tax-efficient arrangements for global investor bases.

Final Thoughts:

In just over a decade, private credit has evolved from a relatively obscure corner of finance to a mainstream pillar of corporate funding. The U.S, the UK, and Europe are all witnessing the same fundamental trend: companies and their sponsors are embracing the flexibility, speed, and tailored solutions offered by non-bank lenders, while investors are pouring capital into these loans in search of higher returns.

This symbiotic growth has reconfigured how credit is supplied to businesses, complementing and, in some cases, competing directly with banks and public markets. It was born out of the post-2008 environment of bank caution and low yields, but it has proven durable even as interest rates and market conditions shift.

Looking ahead, the rise of private credit raises essential questions. Will it continue its breakneck growth to become a multi-trillion-dollar asset class on par with traditional banking? Are we heading toward a world where, for many companies, "private credit is the new bank?” [26]

For finance professionals and business leaders, understanding private credit is now essential. This once esoteric field is now central to financing middle-market firms and even large-cap deals – in other words, central to the real economy. The rise of private credit underscores a broader theme in modern finance: innovation filling gaps left by regulation and market evolution. As we move further into the 2020s, the private credit story will be one to watch, balancing its impressive growth against the careful management of its inherent risks.