USA - NATIONWIDE: An Introduction to Private Credit

Introduction

The private credit market has evolved into a major component of the global financial landscape, offering a compelling alternative to the traditional syndicated bank lending market and the high yield bond market. Below we provide an overview of the key themes and trends shaping the evolution and proliferation of private credit.

Thus far, private credit has been available and open for business through almost every market cycle. Even in the extremely dynamic market in the first half of 2025, private credit funds have demonstrated resilience and flexibility, remaining nimble and active through extreme turbulence. Private credit funds have quickly adapted to tariffs and other regulatory uncertainty, and they remain able to deploy credit.

Overview of Private Credit Market

The expansion of private credit over the last 15 years has been driven by a confluence of factors, including regulatory changes, investors searching for better terms, floating rates and higher yields, as well as the increasing sophistication of private credit providers and their limited partner backers. As of the end of 2024, the global private credit market was valued at approximately USD1.8 trillion, with projections suggesting it could more than double in the coming decade.

In the United States, private credit has become a cornerstone of corporate finance, offering flexible and tailored solutions to borrowers. We have seen some market commentary that suggests a significant majority of the financing needs of private-equity-backed portfolio companies will be derived from private credit in the near term. In the sponsored middle market and upper middle market, and in the late venture stage, private credit providers have become important players alongside traditional investment and commercial banks. Even in the rarified air of the largest leveraged buyouts, private credit providers are playing larger and more prominent roles in debt financing the most complicated buyouts, including the recent Walgreens buyout by Sycamore Partners.

Key Themes and Trends in Private Credit

Market consolidation and strategic partnerships

The private credit market is experiencing a wave of consolidation, with larger firms acquiring smaller players to enhance their market presence. BlackRock’s USD12 billion acquisition of HPS and Clearlake’s purchase of MV Credit are indicative of this trend. Additionally, strategic partnerships between banks and private credit funds are becoming increasingly common, allowing both parties to leverage their respective strengths. Citigroup’s USD25 billion partnership with Apollo and Wells Fargo’s USD5 billion collaboration with Centerbridge Partners exemplify this “co-opetition” model, which enables banks to offload risk while maintaining client relationships and which provides private credit funds with access to a broader range of investment opportunities. In 2025, these partnerships and strategic mergers will be tested. As of the first half of 2025, we are seeing great success for the leading funds that have developed strategic partnerships.

Innovative financing structures: hybrid and junior Capital

Private credit providers are continually innovating to meet the evolving needs of borrowers. Hybrid capital and junior capital solutions, which blend debt and equity elements, have gained traction as versatile tools for optimizing capital structures. These instruments allow firms to manage costs effectively, and meet regulatory requirements without over-leveraging, while enabling sponsors to monetize assets effectively, de-lever debt capital structures, and provide more dry powder for acquisitions. These solutions often involve preferred equity, which positions itself higher in the capital structure than common equity held by private equity sponsors, but that remains junior to existing creditors. The increased use of payment in kind (PIK) interest, for example, allows borrowers to conserve cash by paying interest in-kind, although it also raises concerns about masking underlying financial issues. Not all private credit providers are embracing PIK products — some have close to zero exposure across their entire business development company-disclosed portfolios, others with more opportunistic fund mandates are aggressively pursuing PIK options to maximize returns.

Liability management

Liability management transactions have recently become a focal point in the private credit market, with high-profile and widely publicized transactions capturing the attention of general partners and investors alike. These transactions, which involve restructuring a company’s debt obligations, offer both risks and rewards. On the one hand, they can provide companies with the flexibility to manage their capital structures more effectively, potentially avoiding defaults and preserving value, and often creating option value for shareholders. On the other hand, they can lead to complex negotiations and potential conflicts between debtors and creditors and among creditors. The recent Serta decision in the United States, which involved a controversial liability management transaction, has highlighted the need for private credit providers to navigate these transactions with caution and sophistication. Private credit has shown extreme focus in addressing credit questions around liability management loopholes, but at the same time funds with more opportunistic fund mandates are on hand to provide capital solutions to borrowers and sponsors with troubled credits, especially those with broadly syndicated credits.

Rebound tested: syndicated loan market challenges private credit deals

The resurgence of the syndicated loan market from its post-COVID-19 lull is poised to significantly impact private credit deals, giving sponsors and borrowers more viable options and reshaping the dynamics between these two asset classes. The syndicated loan market, traditionally dominated by banks arranging deals syndicated to collateralized loan obligation investors, is experiencing a more favorable macroeconomic environment, characterized by cooling inflationary pressures and modest interest rate decreases. In 2025 we have seen flashes of 2024’s strong syndicated loan market successfully challenging the private credit market’s strength by refinancing out private credit deals, including the Kaseya refinancing and the recent Alera refinancing.

Conclusion

Over the past 25 years, many private credit funds have delivered incredibly consistent mid-teen portfolio returns while maintaining a low default rate as an asset class. If private credit continues to demonstrate resilience in the face of turbulence, a compelling case could be made that we will see private credit take an even greater share of the US debt market.