The global private credit market has boomed in recent years, particularly in the United States and United Kingdom, and is becoming an increasingly important and interconnected part of the financial system.
Private credit has been one of the fastest-growing segments of the financial system over the past 15 years, and according to McKinsey & Company totalled nearly US$2 trillion (A$3.09 trillion) at the end of 2023, which was tenfold since 2009.
Many different industries and types of businesses worldwide are considering private credit as a financing option, which gives investors new opportunities to access a diverse asset class.
“The narrative about private credit for the past several years has been overwhelmingly positive, though the recent environment might be a little bit different. More broadly, we’ve seen record fundraising, great performance, and a lot of growth in the space,” said Brian Vickery on the Deal Volume Podcast.
In the U.S. it is expected that an additional $5 trillion to $6 trillion could move into the nonbank ecosystem over the next decade, provided interest rates remain elevated above pandemic-level troughs; yield assets continue to perform in line with their historical range and the current regulatory environment for banks persists.
Asset managers, particularly those with a first-mover advantage in private credit, could offer opportunities, via a partnership option to high-net-worth investors.
The U.S. Federal Reserve said the largest investors, or Limited Partners (LP), in private credit are pension funds, insurance companies, family offices, sovereign wealth funds and high-net worth-individuals. LP’s are attracted to portfolio diversification, low correlation to public markets and relatively high returns.
Meanwhile, the International Monetary Fund (IMF) said private credit has provided significant economic benefits over the last 30 years, by offering long-term financing to firms too large or risky for banks and too small for public markets.
Particularly since the global financial crisis, private credit has grown rapidly and taken market share from bank lending and public markets, amid post-crisis regulatory reforms which raised capital requirements for banks and incentivised banks to hold safer assets.
Private credit has emerged as a key lender as banks appear to have become less willing to lend to middle-market firms with riskier profiles in the U.S. and Europe. Private credit assets grew to approximately $2.1 trillion globally in combined assets and undeployed capital commitments in 2023.
North America remains the key player in private credit, but other regions, including Europe and Asia, are experiencing growth. Private credit now accounts for 7% of credit to nonfinancial corporations in North America. Europe has also been growing, albeit at a smaller share of 1.6% of corporate credit. And Asia is experiencing robust growth, totalling about $93 billion and accounting for about 5% of the global total.
The current private credit landscape is mainly dominated by institutional investors, given low liquidity, higher credit risk, and lack of transparency of private credit, with a closed-end fund making up around 81% of the total market.
As the market continues to grow, the regulatory framework in the industry will also evolve to mitigate any potential risks to financial stability.
Disclaimer: This article provides general information and does not constitute financial advice. Always consult a professional advisor before making investment decisions.