Credit Tailwinds Are Rising

The private credit market is poised to expand further this year, propelled by economic growth, attractive yields, abundant dry powder and increasing regulatory constraints on traditional banks.

Direct lenders are prepared to deploy about $300 billion, while leveraged buyout activity appears ready to build on the momentum from late 2024.² Mergers and acquisitions (M&A) activity is also expected to increase,³ particularly in the U.S. because of the new administration’s plans to roll back regulation and anti-trust oversight, as well as cut taxes (though uncertainty related to trade policy could have the opposite effect).

The long-term outlook for private credit is even more favorable, in our view, due to both the appeal and evolution of the asset class. As evidenced by the growth of the market over the past decade, we believe that private credit represents a compelling and durable value proposition for both its users (borrowers) and providers (lenders).

The macroeconomic volatility experienced in the post-pandemic environment has raised the profile of private credit solutions for borrowers who value the expediency, flexibility and partnership-oriented approach that has not historically been characteristic of public market financing. Further, we believe private credit offers borrowers greater closing and pricing certainty, especially in times of market dislocation; greater confidentiality, which may be valuable to certain companies wishing to avoid disclosing information to a broad investor base; and customization of deal terms and covenants to meet the unique needs of the borrower or the asset being financed.

Lenders in private credit markets maintain disciplined fundamental underwriting processes and often enjoy a deeper understanding of the borrowers than traditional lenders. They can also benefit from enhanced returns from illiquidity and complexity premiums, and have the ability to implement structural features to mitigate downside risks in periods of stress.

With such appealing characteristics, the asset class is continuing to evolve. Private credit is best known for corporate direct lending, which has not only dominated the initial evolution of the asset class but has reached maturity, in our view, and may even decline as initial public offering markets open up under the new U.S. administration. We see the next phase of private credit growth concentrated in specialized areas of private credit, including infrastructure, real estate and asset-based finance.

High Yields Are Attracting Capital

Rising deal volume would be positive for the sector. After the Federal Reserve began raising interest rates in 2022, higher yields both attracted capital to private credit and exerted downward pressure on deal volume, with leveraged buyout activity declining in 2022 and the two following years,⁴ contributing to tighter credit spreads and less stringent loan covenants.

The rebound in yields that began in late 2024 could have mixed influences on private credit. Higher-for-longer yields should continue to attract capital to both public and private credit. Yet the window has somewhat closed on the opportunity that borrowers enjoyed to refinance at lower rates as central banks began cutting rates last year. Unless rates ease further, stressed borrowers could face difficult decisions, as private credit loans tend to be floating-rate, and particularly if economic growth sputters.

The private credit default rate in the U.S. last year was under 3%, by one measure of senior-secured and unitranche loans.⁵

Playing the Private Credit Long Game

We believe we are in the early innings of a multi-decade trend of alternative credit growth.

After the Global Financial Crisis, a more stringent regulatory environment spurred banks to retrench, while investors were attracted to higher yields available in private lending. This resulted in an expansion of the private credit market to nearly $1.7 trillion in assets under management (AUM) as of 2023, outpacing both leveraged loans and high yield bonds in market size.⁶ Global private credit AUM will likely expand further to $3 trillion by 2028, according to Moody’s, with 70% growth in the U.S.⁷

However, these figures tend to focus on corporate direct lending, where private credit growth has been concentrated. We believe specialized areas—such as asset-based financing—along with other sources of capital—such as retail and insurance capital pools—have the potential to catapult the private credit market beyond these estimates. The addressable market for private credit could be more than $30 trillion in the U.S. alone, according to an analysis by McKinsey & Company.⁸

This deepening of the private credit asset class provides investors with the potential for greater diversification and the potential to better align portfolio assets with investment objectives.

Capitalizing on a Widening Opportunity Set

Given tight credit spreads and the potential peak in the corporate direct lending market, investors stand to benefit from a widening opportunity set in private credit. Asset-based and specialty finance also provide a means for investors to fund activities that encompass the backbone of the global economy.

Here, we highlight three areas of private credit that we find particularly attractive in the period ahead.

Infrastructure

Infrastructure debt benefits from the unique characteristics of infrastructure assets, particularly those providing essential services in markets with high barriers to entry and consistent cash flows. For this reason, we believe infrastructure debt offers the potential for a compelling combination of attractive risk-adjusted returns, inflation mitigation, lower volatility, asset-liability matching and diversification benefits.

For instance, overall cumulative default rates are multiples higher for nonfinancial corporates compared with infrastructure (see Figure 1, left side). And while recovery rates for corporate and infrastructure trend closer together, corporate recoveries tend to lag infrastructure recoveries over time (see Figure 1, right side). And while corporate rating volatility tends to spike amid market disruptions, infrastructure ratings have remained relatively steady (see Figure 2).

Figure 1: Infrastructure Debt Has Relatively Low Default Rates …

Figure 2: … And Low Rating Volatility

In addition, infrastructure debt stands to benefit from tailwinds to infrastructure growth—what we call the “Three Ds”—of digitalization, decarbonization and deglobalization, along with strong corporate demand for clean power. Brookfield estimates that these megatrends will drive an infrastructure supercycle to the tune of $200 trillion in investment over the next 30 years. With infrastructure and renewable assets typically financed 50%-70% debt to cost, we expect a significant share of this capital deployment opportunity to be in debt.

Real estate

We believe the current higher-for-longer inflationary environment enables us to deliver strong returns while providing downside mitigation.

The correction in the commercial real estate market has largely run its course. Fundamentals in the high-quality office sector and nearly all other sectors of real estate are favorable, in our view, as developed economies continue to expand, led by the U.S.

Real estate debt provides diversification benefits and the potential to generate higher risk-adjusted returns than other fixed income products. In addition, real estate debt has demonstrated lower default rates and higher recovery rates than corporate credit, while occupying a more secure portion of the capital stack than real estate equity.

What’s more, we expect the market to see an uptick in transaction volume, considering the favorable fundamentals and considerable dry powder in private credit and equity ready to deploy (see Figure 3).

Figure 3: Private Equity Real Estate Firms Are Ready to Deploy Billions in Dry Powder

Asset-based finance

Asset-based finance is a rapidly expanding sector of private credit and can include a variety of lending, from consumer loans to lending against aircraft leases or intellectual property rights.

Banks have been retrenching from asset-based lending markets due to the implementation of Basel III and IV “endgame” globally, the adoption of new loan loss accounting standards, and material unrealized losses on bank balance sheets. Private investors are stepping in to fill the void. While estimates vary, we would agree that the investable market is in the trillions of dollars, with private credit only occupying 5% or so today.⁹

Benefits to investors in asset-based finance can include structural protections, diversification from traditional corporate credit, attractive cash flows and opportunities to gain exposure to niche markets with idiosyncratic characteristics and often-overlooked return potential.

Yet, it’s important to invest with experienced managers who can exploit the complexity premium often associated with specialty finance, in our view. While investment companies that focus on private investments often have numerous analysts who have been trained to review a traditional corporate balance sheet, these analysts are less likely to be familiar with evaluating an aircraft lending facility or pool of consumer receivables, for example. Thus, asset managers with deep expertise and long-term relationships can have a competitive edge.

The Backdrop Benefits Private Credit

There is a strong case for investing in private credit. The persistence of high yields contributes to the potential for attractive income and total return, while the growth trend of private credit creates opportunity for investors to be more selective and build objective-focused portfolios. And we believe the current higher-for-longer inflationary environment provides opportunities to deliver strong real returns along with downside mitigation.

To be sure, we expect an ebb and flow between public and private credit during various stages of credit cycles. For example, over the past 12 months, banks have returned to the market through syndications, and they could see a potential regulatory reprieve under the Trump administration. Banks are also partnering with investment managers, with banks focusing on origination and investment managers providing the balance sheet.

The asset class is forecast to hit an all-time high of $2.64 trillion in 2029 from $1.7 trillion today, according to Preqin.¹⁰ We expect private credit will continue to expand significantly as an asset class for several reasons, including its versatile options for borrowers and the potential premium above public credit for investors. Private corporate direct lending likely has matured, opening up plenty of exciting and expanding areas of private credit for investors to consider.

Endnotes:

1. Preqin, “2025 Global Report: Private Debt,” December 2024.    
2. Moody’s Ratings, “2025 Outlook – Primed for growth as LBOs revive, ABF opportunities accelerate,” January 21, 2025.
3. Moody’s 2025.   
4. PineBridge Investments, “Will the Federal Reserve’s Rate Cuts Spur a Rise in Middle-Market Buyouts?,” December 2, 2024.
5. Proskauer, “Proskauer Announces Q4 Private Credit Default Rate of 2.67%,” January 21, 2025.
6. U.S. Federal Reserve, “Private Credit: Characteristics and Risks,” February 23, 2024. The Fed cites Preqin for data on private debt.
7. Moody’s Ratings, “2025 Outlook – Primed for growth as LBOs revive, ABF opportunities accelerate,” January 21, 2025.
8. McKinsey & Company, “The next era of private credit,” September 24, 2024. 
9. OliveryWyman, “Private Credit’s Next Act,” April 2024.
10. Preqin, “2025 Global Report: Private Debt,” December 2024.

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