Private Credit: a silent revolution in financing

1. What is private credit?

Private credit refers to non-listed, privately negotiated debt provided by alternative managers, outside public bond markets and increasingly as a substitute for bank lending in certain segments.

From a macro-financial perspective, this reflects a migration of credit provision from banks and public markets toward non-bank actors, with vulnerabilities around borrower quality, valuation, leverage and interconnectedness, as highlighted by the IMF ( IMF ).

Market size estimates vary by scope. Private debt AUM is around US$1.7 trillion according to Preqin, cited by NEPC , while broader private credit is described as a US$2.1 trillion asset class by BlackRock .

The structural trade-off for bespoke structuring is illiquidity: the lack of deep secondary markets complicates exits and price discovery, especially under stress.

2. Remarkable growth in outstanding volumes

Private credit growth reflects three converging structural forces: banks’ relative retreat from certain credit segments, funding demand from private mid-market companies, and investors’ search for yield, often through floating-rate coupons linked to short-term benchmarks.

Post-crisis regulation materially reshaped banks’ risk appetite. Stronger requirements on capital, leverage and liquidity under Basel III strengthened banking resilience, while indirectly contributing to a shift in credit supply toward non-bank actors ( BIS ).

In adjacent areas such as leveraged lending, US regulators acknowledged that certain prudential guidance may have shifted activity outside the banking system, benefiting non-bank actors including private credit. This highlights the trade-off between regulatory discipline and credit supply continuity ( Reuters ).

On projections, private credit is now described as a US$2.1 trillion asset class, with an expected trajectory to more than double by 2030. This expansion comes with increasing scrutiny around liquidity, valuation, leverage and interconnectedness, as highlighted by both BlackRock and IMF .

3. Returns, investor base and carry mechanics

Private credit is typically positioned as an income-oriented asset class: contractual coupons, often floating-rate, enhanced seniority through covenants and security, and reported lower volatility, partly due to less frequent valuation. In practice, the return/risk profile hinges on structuring discipline, borrower quality and valuation governance.

Over the long run, aggregated data point to returns between public credit and private equity. Over the 10 years ended March 31, 2025, the asset class delivered a net IRR of around 8.4%, according to Callan . This figure aggregates heterogeneous strategies (senior, mezzanine, opportunistic, asset-based), implying meaningful dispersion across managers and risk profiles.

In rising-rate environments, floating-rate coupons (base rate + spread) are often highlighted as a structural advantage. Historical analysis shows that direct lending has, across several tightening cycles since 2009, held up better than high yield and syndicated loans, as noted by Morgan Stanley IM .

The debate has recently shifted toward the expansion of the investor base, notably through semi-liquid (evergreen/open-ended) structures and retail distribution. This raises liquidity-mismatch risk: offering redemption terms that exceed the assets’ true liquidity can generate run-like dynamics under stress, as warned by Moody’s and Reuters .

4. Key segments and market innovation

Private credit extends well beyond corporate direct lending. It spans segments with distinct economic drivers, risk profiles and cycles: senior secured (first-lien), unitranche, mezzanine, opportunistic or special situations, as well as asset-backed strategies (real estate, infrastructure, asset-based). This heterogeneity supports intra-asset-class diversification but complicates aggregate sizing.

Direct lending remains the core segment. It primarily targets private, often mid-market, companies through bespoke contracts and frequently floating-rate coupons. The IMF notes that these borrowers tend to be smaller and more leveraged, increasing their macro sensitivity as financing costs rise ( IMF ).

In private real estate debt, the post-rate-shock environment has revived opportunistic strategies. Benefit Street Partners has highlighted around US$10bn of investable capacity across its U.S. real estate debt platform, illustrating institutional depth in real-assets credit ( Benefit Street Partners ).

In Europe, the most material innovation concerns distribution. ELTIF 2.0 expands the investor base and relaxes several constraints, including a lower eligible-assets threshold (70% to 55%) and the option for open-ended structures under conditions. This reshapes product design and raises new liquidity considerations, as highlighted by ( AFG ).

5. Risks: illiquidity, valuation, leverage and stress dynamics

Private credit risks extend well beyond defaults. The IMF frames its analysis around five main families: borrower quality, liquidity mismatch, leverage, valuation practices and interconnectedness. Illiquidity is structural, and reported stability can mask sharp repricing risk under stress ( IMF ).

The most sensitive issue relates to semi-liquid structures (open-ended or evergreen funds). While most private credit funds do not engage in aggressive maturity transformation, their growing use can create first-mover advantages and amplify run dynamics, particularly as retail participation increases ( IMF ).

Views on systemic risk diverge. JPMorgan CEO Jamie Dimon has warned that private credit could become a “recipe for a financial crisis” if poorly managed, pointing to opacity, underwriting discipline and linkages ( JPMorgan ). Conversely, some bank executives have expressed a more moderate view, suggesting that direct banking-system exposure remains contained, highlighting uncertainty around shock transmission ( Reuters ).

In practice, portfolio resilience depends on tangible factors: covenant quality and enforceability, lien ranking, exposure granularity, valuation governance (frequency, comparables, models), and alignment between redemption terms and the assets’ true liquidity.

6. Outlook: structural role, higher governance requirements

Market consensus is that private credit will remain structurally important in financing, particularly for the mid-market, as long as private capital demand stays strong and companies favour non-public funding routes. BlackRock describes the asset class as roughly US$2.1 trillion and expects it to more than double by 2030, implying sustained institutional flows and broader distribution through European wrappers ( BlackRock ).

In Europe, ELTIF 2.0 is often seen as a potential catalyst to channel savings into the real economy and certain private assets. Market papers highlight changes such as lower eligible-asset ratios, enhanced diversification and conditional open-ended features. These developments broaden access but materially increase product-design and liquidity-risk management requirements ( AFG , ALFI ).

From a financial stability perspective, the IMF stresses that private credit now rivals other major credit markets in size, requiring greater focus on transparency, valuation practices, leverage and interconnectedness. Growth is therefore not only a return opportunity, but also a governance and liquidity-management challenge ( IMF ).

From an investor standpoint, the most robust positioning is to think in terms of holding capacity (long horizon), avoid redemption promises incompatible with underlying assets, and favour platforms demonstrating strong discipline on covenants, collateral, credit selection and valuation governance.

Conclusion

At Hipparchus, we view private credit as a structural transformation of financing rather than a purely opportunistic asset class. By filling gaps left by banks on certain segments, it reshapes capital allocation channels and durably alters the relationship between lenders and borrowers. This evolution is part of a long-term shift driven by bespoke financing needs and the progressive disintermediation of credit.

That said, the market’s growing maturity calls for a demanding analytical lens. Illiquidity is not a peripheral risk but an intrinsic feature, and apparent valuation stability cannot replace rigorous credit analysis, collateral scrutiny and control mechanisms. In a more constrained environment, performance dispersion is likely to increase, drawing a clear line between underwriting discipline and mere cycle carry.

In our view, the core challenge for investors is not access to yield, but the ability to withstand stress regimes. This requires a holding-capacity mindset, strict alignment between liquidity features and asset characteristics, and clearly articulated valuation and risk governance. This is where the difference lies between accounting performance and genuine economic robustness.