Thursday 29 May 2025
What Is Private Credit?
Private credit is a form of lending that happens outside traditional banks and public markets. Instead, the money comes from private lenders, such as investment funds, and is used by companies to meet different financing needs such as business loans, financing at the fund level, or loans backed by assets. There are several types of private credit, including mezzanine loans (which are part loan, part equity), loans for companies in special situations, and debt from struggling businesses. But the most common form is direct lending where private lenders give loans straight to companies without going through a bank. In the UK, private credit is becoming more important. Around 2,000 businesses are now receiving about £100 billion in funding from private credit providers, showing just how significant this type of lending has become.
Why Private Credit Matters
Private credit has proven its value during uncertain times. It offers strong income through floating-rate loans (floating-rate loans, also called bank loans, senior loans, leveraged loans or syndicated loans, pay interest that adjusts with market rates rather than a fixed amount each period) and can help reduce the impact of market volatility. Two of the main strategies in private credit are direct lending and asset-based finance. Direct lending involves loans made directly to companies, while asset-based finance is backed by physical assets such as equipment, vehicles or consumer loans. These strategies work well together and can bring more stability and predictability to an investment portfolio.
One reason private credit has grown so quickly is that, after the Global Financial Crisis, banks reduced lending to higher-risk businesses. This opened the door for private lenders to step in and offer more flexible financing. Over time, both companies and investors have become more familiar with private credit and the advantages it offers. The growing prominence of private credit is evident in a series of strategic hires across the London legal market in recent years. Clifford Chance has brought in fund finance partners Aimee Sharman and Matt Lilley, while Freshfields has strengthened its offering with the addition of Paul Stewart, Mark Davis and Nick Fortune. Meanwhile, Mayer Brown expanded its capabilities by hiring private credit specialist Sheel Patel.
The Market Outlook
After a quiet period, mergers and acquisitions are starting to pick up again. While activity is still below long-term averages, the number of deals increased by 7% last year and the total value of those deals rose by 15%. There is growing optimism that 2025 could see stronger momentum as economic conditions improve and central banks begin to lower interest rates.
This potential rise in dealmaking could give private credit another boost. The market recently passed $3 trillion in assets under management and continues to grow as more companies look for alternatives to bank financing. At the same time, investors are attracted to private credit during times of stability and not just during periods of market turmoil. This is because private credit it offers steady income and competitive returns. Higher interest rates have made this asset class even more appealing. Even though loan margins have tightened slightly, overall returns remain strong. Investors can still earn over 10% without using leverage, and those using moderate leverage can achieve returns in the low teens.
Managing Risks
As private credit has grown, the market has become more competitive. Over the past five years, more than $2 trillion has been raised, which means there is more capital competing for deals. This has led investors to ask important questions about loan quality, potential risks, and whether returns still offer good value. Strong underwriting and careful risk management are more important than ever. Leading private credit managers are being selective, focusing on companies with stable earnings and strong positions in their markets. Asset-based finance is also attracting more interest because it is backed by physical assets. This can offer more protection, especially during times of rising costs, since the loans are tied to real assets rather than uncertain future profits. Although the market is still sensitive to things like interest rate changes and geopolitical events, private credit has remained relatively stable. In fact, during recent periods of stock market volatility, private credit has held up well. This is partly because many investors are focused on larger, more resilient companies that are better prepared to handle economic pressure.
Looking Ahead
As deal activity gradually picks up, private credit is expected to keep expanding. Sectors like technology and infrastructure continue to be key areas of focus, but new opportunities are also emerging in industries such as manufacturing, aerospace, defence and asset-backed investments. Banks are also selling more of their loan portfolios, creating more space for private lenders to step in. At the same time, long-term investors, including pension funds, are increasing their exposure to private credit. They are looking for higher returns and greater stability than what public markets are currently offering.
While there are still some concerns about how private credit is valued, most large firms rely on independent third-party valuations, similar to the approach used by banks. These systems are designed to ensure transparency and strong governance. In short, private credit is playing a bigger role in how businesses are funded and how investment portfolios are built. It offers reliable income, flexibility and the ability to adapt in a changing market.