A quick guide to private credit  

Several factors have contributed to the expansion of the private credit market: 

• Shift away from traditional bank lending: Basel 3.1 further increases the amount of capital that banks are required to maintain with a view to absorbing expected and unexpected credit losses. This means that banks will continue to retrench and provide lower levels of finance to the real economy, inevitably resulting in increased demand for finance from the private credit industry 
• Borrower appeal: Private credit offers speed, flexibility and predictability, making it an attractive option for businesses seeking tailored debt finance solutions 
• Higher yields: Loans in the private credit market often deliver higher yields than bank originated loans, whilst private credit portfolios typically outperform other asset classes when monetary policy tightens due to the underlying floating rate exposures. 

Whether the lender is a licenced bank or a private credit fund, there is a degree of inevitability that some borrowers will go into a state of financial distress, and that lenders may face the prospect of loan losses. However, there are various reasons why private credit is better suited to providing credit than the traditional banks, including: 

• Pro-active monitoring: Private credit managers have smaller portfolios of borrowers than banks and this allows them to better monitor trading performance and react more quickly to agree appropriate corrective action plans with their underlying borrowers and minimise loan losses. Many private credit managers see opportunity where traditional lenders see threat, and a debt restructuring is likely to result in a private credit fund owning a majority stake in its obligor, which could result in enhanced returns being achieved relative to the original senior debt financing base case 
• Less scope for maturity mismatch: Private credit has traditionally been deployed through closed-ended fund vehicles where investors can’t seek redemptions, whereas the traditional source of funding for bank loans is overnight deposits  
• Alignment of interests: Private credit managers typically co-invest alongside their fund investors (i.e. have skin in the game) and are incentivised through performance fees / carried interest to optimise the recovery of loan principal and interest. This is in sharp contrast to traditional bank lending where performance-related pay incentives for bank lending teams are linked to loan deployment (with no regard to recovery) 

The main investors in private credit are insurance companies, pension funds, sovereign wealth funds, family offices, other investment funds (fund of funds) and high-net-worth private clients. 

• Stability of returns 
• Reliable income streams 
• Floating rates – a natural hedge against inflation 
• Seniority in capital stack – lower risk than private equity 
• Attractive risk-adjusted returns 
• Portfolio diversification 

Institutional investors are becoming increasingly drawn to evergreen credit funds, which can allow for periodic redemptions and top-up subscriptions/commitments – making it easier for pension funds and other institutional investors to rebalance their portfolios and adjust allocations compared to closed-ended funds. Evergreen funds can be structured as closed- or open-ended vehicles.   

From the general partner (GP)’s perspective, evergreen credit funds allow the GP to raise capital as and when it chooses from a single fund vehicle, thus reducing reliance on cyclical fundraising campaigns associated with traditional closed-ended funds. It also means that the GP can easily recycle principal repayments into new credit investments and avoid being forced to exit deals at sub-optimal stages of the economic cycle, which might otherwise be the case in closed-ended funds that are in the back end of their harvesting phase. 

The private credit ecosystem includes a diverse mix of lenders and borrowers: 

• Lenders: Private credit funds, insurance companies, platform lenders (FinTechs), public pension funds and family offices 
• Borrowers: Whilst middle market companies and larger enterprises account for the majority of private credit exposures by value, the evolution of the FinTech sector over the last decade has seen platform lenders provide small and medium-sized enterprises (SMEs) and consumers with expedient access to non-bank financing. 

Private credit funds are structured to support various investment strategies, including direct lending, asset-based finance, distressed debt, mezzanine debt and venture debt. Across these various strategies, asset managers are seeking to raise $510.6bn worth of capital across 1,369 individual private credit funds (as at September 2025, according to Preqin Pro data). 

When comparing fundraising trends across major regions, North America and Asia-Pacific are forecast to grow steadily at 3.40% and 3.35% respectively, though the latter is growing from a modest base. In contrast, Europe’s fundraising is expected to remain flat, bottoming out at US$42 billion of new fundraising in 2025 before recovering to US$61 billion by 2029, matching its 2023 capital raise levels. 

In Europe, regulatory developments are unlocking new opportunities for private credit. The implementation of ELTIF 2.0 in the EU and the broader adoption of long-term asset funds (LTAFs) in the UK have spurred a wave of significant fund launches in 2024. These changes, together with the introduction of a pan-European harmonised loan origination framework under AIFMD II, are expected to further catalyse growth and unlock the potential of private credit across the region. 

Mid-market corporate lending (i.e. direct lending) continues to be the most popular segment, although many of the leading credit managers in this space have been focusing more on the large cap segment in recent times, having successfully raised jumbo-sized funds with capital commitments in the tens of billions of dollars.  

Asset-backed finance has become very popular with investors, as exposure to these granular pools (which typically comprise tens/hundreds of thousands of amortising loans) can provide greater diversification, enhanced cashflows and lower risk than direct lending funds, which typically receive quarterly interest payments and bullet repayment of principal at maturity five years later. Furthermore, with the right structuring, asset-backed finance strategies can provide similar returns to investors as direct lending funds. 

Whilst FinTechs, asset-backed lenders and some direct lending managers primarily use unregulated special purpose vehicles (SPVs) to originate credit, most non-bank lending is originated through fund structures such as ELTIFs, Luxembourg RAIFs, and Irish ICAVs and ILPs, which can provide investors with greater protection and facilitate more efficient capital raising (e.g. through the European AIFM marketing passport).