Behind the Private Credit Surge

October 21, 2025

Read Time: 8 minutes

Authored by: Jean Robert

Finance & Markets

Private Markets

Private credit is one of the fastest-growing asset classes of the last 15 years, as noted by McKinsey ⁱ. By the end of 2023, the asset class had totaled nearly $2 trillion, representing a tenfold increase compared to 2009.

A fundamental shift in the regulatory landscape has played a large part in this growth story. After the 2008 Global Financial Crisis, regulations such as Dodd-Frank in the U.S. and Basel III globally increased banks’ capital requirements for riskier assets, locking them out of much leveraged lending and limiting the supply of credit. These constraints are only intensifying with the anticipated Basel III endgame, expected to widen the gap in the lending market that private credit has rushed to fill.

On the other hand, private markets have accumulated capital, i.e., dry powder, to invest. This evolution has encouraged private lending and private credit funds. Low interest rates and competitive private equity markets have also heated up demand for alternative lending solutions.

An analysis by S&P Global Market Intelligence ⁱⁱ illustrates this dynamic. In 2024, private debt funds accounted for 77% of leveraged buyout debt financing globally, marking the highest share since 2015. Banks provided the remaining 23%, notably representing the lowest share for banks over the same period.

The proliferation of private credit activity has not slowed. BlackRock forecasts that total assets under management (AUM) could reach $4.5 trillion by 2030, approximately double the current level, as more capital continues to flow into this asset class.

Regulatory revolution and accumulating dry powder have reshaped corporate lending. First private credit and its various strategies, from direct lending to distressed debt, have filled the void left by banks. Second, the sidelining of banks has had a 15-year trajectory, progressively pushing traditional lenders out of leveraged lending. Third, private credit's flexibility and speed have created durable advantages over traditional syndicated lending, especially for private equity sponsors who seek competitive deal environments. This dynamic explains why industry leaders project continued growth through 2030, with assets potentially doubling to $4.5 trillion. Finally, the rapidly evolving market is already spawning a new ecosystem, linking asset managers, banks, pension funds, and insurers in novel partnerships that blur traditional boundaries between lenders and investors.

Inside private credit

Private credit allows borrowers to seek capital outside traditional bank lenders or public securities markets. Private credit investments are typically arranged in bilateral negotiations between the lender and the borrower or a private equity sponsor. Some deals are arranged by small lender groups, dubbed club deals. Private credit instruments are not publicly traded and are typically used to provide funding to private businesses or fund leveraged buyouts of mid-sized companies.

Private credit includes a range of lending and credit investment strategies, including direct lending, asset-based finance, distressed debt, mezzanine lending, special situations, and venture debt.

Private Credit Types

Direct Lending: Loans to mid-market borrowers that provide lenders with consistent income from loan payments
Asset-Based Finance: Loans based on specific collateral, including inventory, capital equipment, and future receivables
Distressed Debt: Debt acquired to support companies with turnarounds or fiscal improvements
Mezzanine Lending: Combined financing, including debt and equity, to yield higher returns
Special Situations: Lending intended for corporate transitions (e.g., mergers or restructurings)
Venture Debt: Growth capital for startups that provides an alternative to diluting equity

Direct lending^iv is the largest of these strategies (accounting for 36% of total AUM over the last 15 years), but as private credit space evolves and investors seek other routes to participate, additional strategies are gaining more attention.

Banks sidelined

The expansion of private credit coincides with the period of crisis in the global banking system in 2008. This turbulence ushered in a new regulatory environment, increasing the cost of capital for riskier assets. It has also made banks less willing to lend. The story can be broken down into two waves, the first characterized by the initial response to the crisis, and the second by a more forward-thinking mindset.

First wave: 2010s (A shift away from traditional bank lending to leveraged borrowers)

2010: The U.S. Congress passed the Dodd-Frank Act, under which banks faced increased regulatory scrutiny and stringent capital requirements, raising the cost of lending to non-investment grade borrowers.

2013:

The Federal Deposit Insurance Corporation (FDIC) updated its Leveraged Lending Guidance,^v requiring increased evaluation of portfolio exposure, further diminishing bank appetite for lending to lower-rated borrowers.
European banks began operating under new Basel III capital requirements.
The U.K. implemented comprehensive regulatory reforms through the Financial Services Act to strengthen lending standards, collectively creating a transatlantic shift away from traditional bank lending to leveraged borrowers.

Second wave: 2020s (Anticipation of further regulatory tightening)

2020–2025: Market participants are anticipating the implementation of Basel III endgame, the final phase of global banking reforms and capital requirements born out of the financial crisis.

2024: Under these regulatory regimes, banks have retreated from leveraged lending, leaving the door open for alternative lenders to pick up the slack. “Regulations have had a consequent chilling effect on public debt markets, such as syndicated loans. Banks have also become much more discriminating about the clients to which they will lend,” according to BNY.^vi

2025: The Federal Reserve is seeking a looser version of the Basel III endgame, as Bloomberg reported.^vii

New order

Borrowers still need access to debt capital. Alternative asset managers, with significant capital to deploy, see this need as a golden opportunity. More flexible financing options and ease of execution marked the beginning of a change in thinking away from banks as the primary source of debt financing, paving the way for the rise of private credit. This change not only reshaped the ways borrowers access capital but also profoundly altered the lending landscape, effectively transferring credit risk to non-bank lenders, institutional investors, and asset managers.

In contrast to broadly syndicated bank loans offered by banks, which are typically subject to standardized terms and conditions, private credit is more bespoke in nature, making debt instruments highly customizable and subsequently tailored to borrower needs. Bilateral deals or those provided by a small group of lenders can be more efficient in competitive buyout processes, for example.

Private equity firms and borrowers favor direct lending for its ease of execution and certainty of funding, especially in volatile markets and amid macroeconomic uncertainty. Being able to customize financing packages offers convenience and can provide competitive advantages in a hot M&A environment. However, these deals are often unrated and tend to be more opaque, complex, and highly specific, presenting distinct challenges from a credit analysis and portfolio performance perspective.

Middle market companies with annual revenues between $10 million and $1 billion have been the typical recipients of direct lending strategies, but private credit has in recent years been able to arrange bigger deals for large corporate borrowers that were traditionally financed in the broadly syndicated leveraged loan market.

Next chapter

Global investment firm Brookfield^viii expects investors to continue to seek out differentiated strategies. “Private credit is only in the early innings of a multi-decade trend of growth and evolution, as borrowers capitalize on its flexibility and investors are drawn to its enhanced yields and the potential for a premium over public credit.”

McKinsey and others evaluating the future of the market note that a new private credit ecosystem is emerging across asset managers, banks, and insurers, suggesting more linkages between these groups and noting that this development will support the origination, syndication, structuring, and distribution of assets at significant scale.

“We expect four trends to define this new ecosystem: expansion of private credit into a broader array of assets, rise of ecosystem partnerships and open-architecture business models, amplified advantages of scale for competitive differentiation, and increased focus on technology to boost scale and performance,” McKinsey wrote about the next era of private debt.

Outlook

Private credit appears poised to continue expanding and evolving. The market for private debt has so far enjoyed smooth sailing in terms of steady growth and strong performance.^ix

As private credit continues its evolution from niche alternative to mainstream financing option, the asset class appears well-positioned to play an increasingly central role in corporate lending. With significant dry powder still to deploy, continued regulatory constraints on traditional bank lending, and growing acceptance among borrowers and investors alike, private credit's transformation of the lending landscape is likely to accelerate rather than slow.

The next chapter will be defined by how successfully private credit managers navigate scale, maintain underwriting discipline, and adapt their strategies to an ever-expanding universe of opportunities. For now, what began as banks stepping aside has become a fundamental reordering of how companies access debt capital.

Authored By

Jean Robert

20+ years of direct credit experience with a background in helping debt issuance groups of all types leverage financial technology to scale operations and enhance deal execution. At Arcesium, his focus is on partnering with private asset firms to achieve their infrastructure goals in the middle and back-office, supporting efficient revenue growth while improving the total cost of ownership of their systems.

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Sources

[i] McKinsey, September 24, 2024, The next era of private credit. https://www.mckinsey.com/industries/private-capital/our-insights/the-next-era-of-private-credit

[ii] S&P Global Market Intelligence, February 6, 2025, Private debt’s share of buyout financing hits decade high. https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/2/private-debts-share-of-buyout-financing-hits-decade-high-87373500

[iii] BlackRock, June 2025, 3Q2025 Global Credit Outlook: Two-sided risks. https://www.blackrock.com/ca/institutional/en/insights/credit-outlook

[iv] Morgan Stanley Investment Management, February 24, 2025, Evolution of Direct Lending. https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/evolution-of-direct-lending.html

[v] Morgan Stanley Investment Management, 2025, Evolution of Direct Lending: Private Credit Primer. https://www.morganstanley.com/content/../publication/thought-leadership/article/article_evolutionofdirectlending.pdf

[vi] BNY Aerial View, June 27, 2024, The Inexorable Rise of Private Credit. https://bk.bnymellon.com/Aerial-View---Long-Read-The-Inexorable-Rise-of-Private-Credit.html

[vii] Bloomberg, August 1, 2025, Fed Starts Talks on a Looser Version of Basel III Endgame. https://www.bloomberg.com/news/articles/2025-08-01/fed-starts-talks-on-a-more-relaxed-version-of-basel-iii-endgame

[viii] Brookfield, Private Credit Opportunities: The Universe Keeps Expanding. https://www.brookfield.com/news-insights/insights/private-credit-opportunities-universe-keeps-expanding

[ix] Reuters, February 14, 2025, Buyout firms’ equity-debt double act is creaking. https://www.reuters.com/breakingviews/buyout-firms-equity-debt-double-act-is-creaking-2025-02-14/

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Behind the Private Credit Surge

Inside private credit

Private Credit Types

Banks sidelined

New order

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Outlook

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Inside private credit

Private Credit Types

Banks sidelined

New order

Next chapter

Outlook

Subscribe Today

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