What is private credit?
Private credit refers to the provision of loans and debt financing by non-bank lenders.
This includes (but is not limited to) lending by asset managers, insurance companies and private equity firms. Private credit excludes bank loans, broadly syndicated loans, and funding provided through publicly traded assets such as corporate bonds.
Whilst traditional UK bank lending is regulated by the Financial Conduct Authority and the Prudential Regulation Authority, private credit operates largely outside of these regulatory perimeters.
The private credit market was valued at around £1.58 trillion by the end of 2023 and is estimated to grow to £2.22 trillion by 2028, with new players continuing to enter this space.
In this article we examine private credit’s growth trajectory and its transformation into a mainstream financial force, as well as recent trends and predictions for the future.
The rise of private credit: A 15-year evolution
We have identified four possible explanations for the rise of private credit over the last 15 years.
1. Increased regulation on banks
Increased regulation on banks following the 2008 global financial crisis, such as increased capital adequacy requirements, have acted as a supply constraint on bank lending. This has diminished the risk appetite of banks and presented an opportunity for private credit providers to "fill the gaps" and provide alternative financing solutions.
2. Growth of alternative investment managers
The growth of alternative investment managers has acted as a supply driver to the private credit space.
3. Return on investment
Potentially lucrative returns for investors have made private credit an attractive investment option.
4. Flexibility
Private credit has the capacity to provide more flexible, tailored solutions than banks, who are typically required adhere to specific lending criteria and provide funding based on standardised loan products.
Key trends in private credit
- Private credit and M&A activity: Around 70% of private credit transactions are carried out to support M&A activity. Private credit is particularly prevalent in mid-market M&A transactions.
- Diversified sector exposure: In the UK, private credit displays a well-diversified sector exposure. Research by Fitch Ratings shows that:
- 27% of transactions are in the Business Services & Infrastructure sector
- 26% of transactions are in the Technology, Media & Telecoms sector
- 19% of transactions are in the Financial Services sector
- 9% of transactions are in the Healthcare sector - Partnerships with banks: Private credit lenders are increasingly partnering with traditional banks in a shift towards an "originate-to-distribute" model for banks, where banks originate loans but sell them to private credit providers, such as asset managers, rather than holding them on their balance sheets. This enables banks to maintain lending activity whilst managing risk exposure.
Predictions for the future
- Bank shift to sponsors: As private equity continues to take a larger share of mid-market M&A lending, coupled with banks showing a reduced risk appetite, we may see a shift where banks focus more on lending to sponsors and less to corporates. This shift is likely also driven by the expectation of lower leverage at the sponsor level.
- Bank-private credit partnerships: We expect these partnerships to grow as banks look for ways to improve their lending activity amid increased competition from private credit competitors.
- Risk management: The International Monetary Fund last year called for a greater regulatory approach to private credit funds and a focus upon liquidity management to prevent potential vulnerabilities from becoming systemic. We expect more discussion around regulation of private credit to be on the horizon.
