The $3 Trillion Bet: The Private Credit Surge, the Forces Driving It, and the Doubts Ahead

Where Did It All Begin?

The size of private credit at the start of 2025 was $3 trillion and is estimated to grow to approximately $5 trillion by 2029.¹ This growth is driven by its ability to provide tailored financing options for companies, including those with higher credit risks or limited collateral. In the past, private credit mostly focused on medium-sized businesses and was available only to institutional investors, such as pension funds and insurance companies. However, it is now increasingly being used by larger companies and is becoming more accessible to retail investors.

To understand the cause behind this expansion, let us go back to 2008. After the Global Financial Crisis when safe investments paid relatively little, illiquidity premiums made the asset class especially attractive to investors.

Banking regulatory trends post the 2008 Financial Crisis have increased the cost of capital for riskier assets, such as leveraged finance lending. In the article "Private credit: Characteristics and Risks" published by the Federal Reserve on 23 February 2024, the authors note that tighter regulations could speed the shift of credit from banks to private credit lenders, and that banks stand to lose underwriting fees to private credit funds as a result - developments that, in their view, will make private credit increasingly central to how credit markets function.³

The second major boom was in 2022 due to the symbiotic relationship between private credit and private equity. To help finance a leveraged buyout or acquisition, a PE firm will typically seek additional financing. This has traditionally been provided by the public market, but deal activity began to bifurcate towards private credit during 2022. A rapid rise in interest rates from the Federal Open Market Committee (FOMC) put downward pressure on loan prices. This deterred investors from the market and led to some high-profile deals being left on the balance sheet of arranging banks. This created space for private credit funds to step in and establish a larger market share in LBO financing.

Why Private Credit?

There are a multitude of factors behind the boom.

Firstly, investors are shifting towards direct lending due to desirable performance metrics such as lower volatility, higher yields, and superior risk-adjusted returns over public debt. Private credit is remarkably resilient, with average losses during the Covid-19 pandemic at half that of high-yield bonds.²

Unlike most bank loans, private credit solutions can be tailored to meet borrowers' needs in terms of size, type or timing of transactions. Moreover, as the majority of private credit lending is in the form of floating-rate investments that change as rates change, this provides interest rate protection compared to investments like fixed-rate bonds which are vulnerable to price fluctuations.

Within private markets, private credit has delivered strong risk-adjusted returns relative to private equity, venture capital, real estate and other real assets such as infrastructure.¹

In short, the surge in popularity can be attributed to the increased exposure offered for investors to corporates and sectors, increased flexibility in capital use, increased opportunities to collaborate with borrowers on ESG matters or in work-outs, increased resilience, and increased risk-adjusted returns.

Increasing Uncertainty

Direct lending volumes in the United States declined in 2025, with estimates showing a fall of 10% and deal count following suit by about 16 percent.⁴ With a series of defaults and losses in leveraged credit having grabbed headlines, the asset class is now facing potentially the most challenging performance environment it has yet experienced, with a new set of cyclical and structural risks.

The future of private credit is uncertain due to three main factors.

Firstly, there is rising borrower stress from high interest rates. Many companies borrowed when rates were low. With rates staying higher for longer, paying back those debts becomes more challenging and leads to increased risk of defaults.

The second factor is technological disruption like AI threatening software companies. A significant proportion of private loans went to tech and software firms. As AI reshapes how software is made, some business models are at risk of failing to meet cash flow requirements, increasing default risk.⁵

Thirdly, there is a mismatch where funds promise fast cash to investors while holding loans that are difficult to sell. As private credit funds lock money into long-term illiquid loans, this can create a "cash trap" when withdrawal demands spike. This can lead to investor panic and potential losses hidden by slow asset revaluations.⁶

The industry at its current size and scope presents vulnerabilities such as credit quality vulnerabilities, interconnectedness with insurers and private equity firms, cross-border interlinkages, leverage, liquidity mismatches, and concentration.⁷

The failure of private credit could become a systemic risk; for example, if funding in the asset class dried up this can make it difficult for businesses to roll over loans or achieve new credit.⁸

The general trend that can be seen is a shift of leveraged buyout financing growing through larger but fewer deals, having risen to $81 billion in 2025 from $73 billion in 2024 even as the deal count declined to 214 (from 248). This increase was more than offset by a decline in non-LBO activity, including refinancings and recapitalisations, which slipped by nearly 20 percent from the prior year. That said, volume remained substantially elevated relative to pre-2024 levels. The scale of the shift towards larger deals is evident. The average LBO deal size for direct lending, rose by 29 percent. This is further demonstrated by the €6.5 billion unitranche refinancing for Norwegian online classifieds group, Adevinta, which is the largest european direct lending deal on record.⁴

Market Outlook

Despite recent challenges such as borrower defaults, regulatory focus, and fund redemptions, portfolio managers in PwC's Global Private Credit survey reflect an optimistic market sentiment for the future. However, they acknowledge the asset class is entering its first significant credit cycle with increased competition, causing margins to come under pressure. In PwC's Global Private Credit survey, two-thirds of respondents say increased competition is the main driver affecting fund performance this year, followed by defaults and credit losses (64%). As a result, 93% of respondents expect zero or lower returns for this calendar year.⁹

It's Not All Doom and Gloom

According to Catherine Atkinson, PwC UK Performance & Restructuring Partner, an increase in the absolute number of stressed credits and defaults across private credit portfolios is inevitable as the market continues to grow and managers oversee larger, more mature portfolios. However, this does not necessarily indicate a fundamental deterioration in credit quality or suggest that there are significant increases in portfolio default rates. Stress is likely to be more concentrated in weaker credits and more challenged sectors.

Additionally, the pressure on returns is not reducing demand for private credit. Instead, it is driving product innovation. Capital is increasingly shifting towards specialist strategies, including asset-backed finance, non-sponsor lending, and the selective use of leverage.

At the same time, competition is turning into coopetition as partnerships between private credit and banks are becoming more prevalent. The combination of both players will allow better lending solutions to be available in the market for customers across a range of asset classes. Private credit can achieve scale by accessing banks' origination, servicing, and product manufacturing infrastructure. For banks, these partnerships can unlock lending opportunities that would not otherwise exist given regulatory and risk constraints.

Moreover, there are various possible opportunities for growth, such as the growing popularity of continuation funds which is driving strong demand for these structures or rescue-financing capital, should the economy enter into a recession or high-default environment. Moreover, in a soft economic landing aided by shallow rate cuts, direct lending could grow as demand for leveraged buyout loans is stimulated by increased private equity deal flow. Furthermore, with the rise of AI, there is a critical demand for private credit to finance capital intensive infrastructure projects such as data centres.

Final Thoughts

The rise of private credit has the power to raise industries whilst the collapse has dire consequences. With increased growth comes increased risk, and the future of the market is uncertain under an ever-changing macroeconomic environment. High interest rates, potential AI-driven disruptions and opaque loan valuations pose threats to the perceived security of the asset class. However for now, the market maintains an optimistic outlook.

Footnotes

1. Morgan Stanley, Understanding Private Credit's Rapid Growth (opens in a new tab), 3rd October 2025. ²

2. Deutsche Bank, Private Credit – A Rising Asset Class Explained (opens in a new tab), 9th October 2024. ²

3. Federal Reserve, Private Credit: Characteristics and Risks (opens in a new tab), 23rd February 2024.

4. McKinsey & Company, Private Credit in 2025: A Maturing Industry Navigates Change (opens in a new tab), 9th June 2026. ²

5. Fidelity, Why Are People Suddenly Talking About "Private Credit"? (opens in a new tab), 20th March 2026.

6. Oaktree Capital Management, What's Going on in Private Credit? (opens in a new tab), 9th April 2026.

7. Financial Stability Board, Report on Vulnerabilities in Private Credit (opens in a new tab), 6th May 2026.

8. J.P. Morgan Asset Management, Private Credit Will Not Upset Risk Sentiment (opens in a new tab), 15th June 2026.

9. PwC, Private Credit Survey 2026 (opens in a new tab), 26th May 2026.