Averaging Outsized CAGR, The Growth Story of Private Credit

Private credit is booming. This fast-growing asset class has transformed from a niche market into a $2.1 trillion global industry as of mid-2023, with projections to hit $3.5 trillion by 2028. Offering higher yields, diversification, and stability, private credit is reshaping how businesses secure funding and how investors approach their portfolios.

Key Highlights:

• Market Growth: Grew from $1 trillion in 2020 to $1.5 trillion by early 2024; projected to reach $2.6 trillion by 2029.
• Attractive Yields: Senior secured private credit loans offer 9–10% annual returns, with opportunistic strategies delivering up to 15%.
• Drivers of Growth: Regulatory shifts post-2008, private equity demand, and diversification needs from pensions, insurance firms, and retail investors.
• Emerging Opportunities: Asset-based finance, AI infrastructure, and cross-sector collaborations with banks.

Private credit offers investors a stable, high-yield alternative to public markets, with low volatility and strong growth potential across industries like technology, healthcare, and real estate. Dive into the details to understand why this asset class is becoming a cornerstone of modern finance.

How Private Credit Became One of the Hottest Investments on Wall Street

What Drives Private Credit Growth

Private credit is on a remarkable trajectory, reshaping the lending world as we know it. Several key factors are fueling its growth, and understanding these can shed light on why this asset class continues to gain momentum and deliver strong returns.

Economic Trends and the Shift from Traditional Banks

The corporate lending market has undergone a major transformation, largely due to stricter regulations on traditional banks. After the 2008 financial crisis, reforms pushed banks to adjust their balance sheets, leaving gaps in the market that private credit has eagerly stepped in to fill.

Here's a striking example: in 2020, banks accounted for 44% of all corporate borrowing. Fast forward to 2023, and that figure dropped to just 35%, while nonbank lenders surged to fill the void. This isn't a temporary adjustment - it's a fundamental shift in how businesses secure funding.

"The lending model of the larger regional banks appears to be most exposed to competition from nonbanks." - The Brookings Institution

Regulations like Basel III capital requirements are tightening the screws further, particularly for riskier clients. As a result, companies that might have turned to banks in the past are now looking to private credit providers instead.

Interestingly, banks haven't been entirely sidelined. Many are adapting by collaborating with private credit funds. Take Wells Fargo, for instance. In September 2023, the bank teamed up with Centerbridge to launch Overland Advisors, a subsidiary offering $5 billion in direct lending. This partnership model allows banks to stay involved while navigating regulatory hurdles. These shifts highlight how private credit is becoming a cornerstone of modern financing strategies.

The Role of Private Equity and Yield-Seeking Investors

Private equity (PE) firms are playing a huge role in driving demand for private credit. With PE dry powder expected to hit a record $1.6 trillion by the end of 2024, the need for debt financing to close deals is skyrocketing. Since 2020, private credit has outpaced the syndicated loan market in funding leveraged buyouts, thanks to its speed, certainty, and flexibility.

But it’s not just private equity fueling this demand. Corporate pensions are shifting from equities to private investment-grade credit, drawn by higher yields and the chance to diversify portfolios. Insurance companies are also turning to private credit, appreciating its ability to align with their long-term liabilities.

Retail investors are another growing force. While they currently account for less than 20% of private debt assets under management (AUM), their share is rising fast. Interval funds, which provide retail access to private credit, have seen their assets grow by about 40% annually over the past decade. According to Federal Reserve data, many investors are drawn to private credit for its low correlation to public markets, diversification benefits, and attractive returns - potentially exceeding 10% gross on an unlevered basis.

Emerging Opportunities in Private Credit

Private credit isn’t just sticking to traditional deals. It’s branching out into new areas, unlocking untapped opportunities. The potential market for private credit spans over $30 trillion across various asset classes.

One standout area is asset-based finance (ABF), which involves lending against tangible assets like real estate, equipment, and inventory. Currently, ABF represents a $6 trillion market, with projections suggesting it could grow beyond $9 trillion. These assets offer lenders additional security, making them an attractive option.

Meanwhile, the boundaries between public and private markets are becoming increasingly blurred. This is opening the door for private credit managers to explore deal structures that were once beyond their reach. From traditional lending to cutting-edge financial strategies, private credit continues to expand its footprint, signaling even broader opportunities ahead.

Private Credit Methods and Sector Uses

Private credit has grown into a field with varied strategies designed to meet different risk and return goals. By understanding these methods and the industries they serve, investors can see how private credit delivers strong performance while offering diverse financing options. These strategies also lay the groundwork for ethical and long-term investment approaches.

Types of Private Credit Methods

Private credit strategies can generally be grouped into two categories: lending-focused and opportunistic approaches.

Direct lending is a cornerstone of private credit, where funds lend directly to businesses without involving traditional banks. Loans typically run for three to five years and aim to deliver annual net returns of 8%–10%. This approach is particularly appealing for investors seeking steady income with less volatility compared to equity markets.

Specialty finance focuses on lending that is backed by specific assets, such as equipment, real estate, or inventory. Unlike direct lending, asset-based lending (ABL) ties the loan to particular assets, providing an added layer of security and separating the debt from a company’s general creditors.

Opportunistic credit strategies aim for higher returns, often in the range of 12%–15% annually. These strategies tackle more complex situations and offer a broader range of capital solutions than traditional lending.

Other approaches include mezzanine financing, distressed debt investing, venture debt for growth-stage companies, and structured credit. Some investors also combine lending and opportunistic methods for a more tailored approach. Notably, private credit spreads tend to be 200 to 600 basis points higher than those found in public markets.

Sectors That Use Private Credit

Private credit has proven to be a valuable financing solution across a variety of industries, each with its own unique needs and growth dynamics.

• Technology companies often rely on private credit, especially venture-backed firms that choose to stay private longer and need customized funding options.
• Healthcare and biotechnology benefit from private credit’s ability to support industries with long development cycles and research-intensive projects.
• Infrastructure projects are another key area, as initiatives like artificial intelligence (AI) drive demand for capital-intensive investments in real estate, infrastructure, and growth lending.
• Real estate continues to be a major sector, with private credit funding everything from construction loans to acquisition financing.
• Middle-market companies, often overlooked by traditional banks, turn to private lenders for growth financing, acquisitions, and recapitalizations.
• Industrials, particularly in aerospace and defense, require specialized financing for long-term contracts and complex projects.

With an addressable market exceeding $30 trillion across these and other asset classes, private credit has significant room for growth.

Steadfast Equity's Private Credit Approach

Steadfast Equity leverages these sector-specific opportunities while adhering to an ethical framework that prioritizes sustainable growth. The firm focuses on industries like technology, AI, biotechnology, and real estate - areas with strong fundamentals and long-term potential. For instance, the AI sector alone is projected to grow at an annual rate of 35.9% from 2025 to 2030, creating significant opportunities for strategic investment.

"At Steadfast Equity, our firm commitment to long-term value creation is the cornerstone of everything we do. While others may chase fleeting trends, we remain focused on investments that endure."

Steadfast Equity avoids investments that could support harmful activities and seeks partnerships with investors who value ethical and sustainable growth over short-term gains.

"We seek to attract like-minded investors who understand the importance of a long-term perspective and seek to partner with a firm that prioritizes ethical, sustainable growth over short-term gains."

With over $800 million in assets and less than $200 million in liabilities, Steadfast Equity’s strong financial position and 20+ years of experience allow it to provide patient capital. By building long-term relationships with portfolio companies, the firm ensures it can meet borrower needs and offer consistent support throughout the investment process.

Measuring Private Credit for Ethical Investing

Ethical investing in private credit has grown from simple exclusions to a sophisticated approach that balances returns with responsible practices. With global sustainable investments surpassing $30 trillion - a 68% increase in recent years - investors in private credit are developing new methods to evaluate both financial outcomes and ethical impact. Below, we explore the tools and strategies that help integrate ethical metrics into performance evaluation.

Tools for Measuring Private Credit Performance

Traditional private credit performance often focuses solely on risk-adjusted returns. However, ethical investing requires additional metrics to assess both financial success and social or environmental impact.

• ESG-Enhanced Risk Assessment:ESG metrics provide deeper insights into risks, such as those related to climate change, governance issues, or social challenges, which could influence loan performance.
• ESG-Margin Ratchets:These mechanisms adjust loan margins based on meeting specific ESG-related key performance indicators (KPIs). In Europe, about 25% of private credit loans include these ratchets, offering an average margin reduction of 7 basis points per KPI achieved [23,30].
• Climate Scenario Analysis:This tool evaluates how climate-related risks and opportunities could impact portfolios over time, allowing investors to stress-test their investments against various climate scenarios.
• Third-Party Verification:Around 55% of loans undergo independent audits to validate ESG data and the strength of margin ratchets.

These tools demonstrate how ESG considerations are becoming integral to evaluating private credit investments.

Adding ESG to Private Credit Portfolios

Incorporating Environmental, Social, and Governance (ESG) factors into private credit portfolios is no longer optional - it’s becoming standard practice. ESG-linked loans now represent 25% of private credit transactions.

• Sector-Specific ESG Integration:ESG integration is most prevalent in Industrials, Healthcare, and Consumer Discretionary sectors, which account for roughly 75% of ESG-focused deals. These industries naturally align with measurable ESG outcomes, making it easier to track progress.
• KPI Development and Monitoring:Lenders typically monitor four KPIs per ESG-linked loan, with cumulative discounts averaging nearly 30 basis points. Beyond simple data reporting, these KPIs often tie directly to cost savings and measurable outcomes.
• One-Way vs. Two-Way Ratchets:Approximately 70% of ESG margin ratchets operate as "one-way", meaning they only lower capital costs when ESG performance improves.

For example, in Europe, ESG-linked loans grew from €660 million in 2020 to over €923 million in 2021, highlighting the rapid expansion of ESG integration.

Steadfast Equity's Ethical Investment Approach

Steadfast Equity has taken ethical private credit investing to the next level, embedding ethics into every step of its investment process. The firm has crafted a framework that goes beyond traditional ESG metrics to focus on responsible and impactful capital deployment.

• Character-Based Investor Selection:Steadfast Equity applies strict character screening, ensuring that investors align with its ethical values.

  "We prioritize investors who share a commitment to mutual respect, lawful conduct, and the ethical use of proceeds."

  • Steadfast Equity

• Proactive Harm Prevention:The firm actively avoids investments that could contribute to harm, such as criminal activities or industries that conflict with its mission.
• Integrated Value Framework:By blending CARE (Community, Adaptability, Responsibility, Ethics) with PROFIT (Purpose, Return, On Financial, Intangible Tangibles), the firm aligns financial goals with broader ethical objectives.
• Long-Term Stewardship Philosophy:Steadfast Equity focuses on sustainable growth over short-term gains, ensuring that investments create value for all stakeholders.

  "At Steadfast Equity, our investment philosophy is rooted in the principles of long-term value creation, safety, and ethical stewardship."

  • Steadfast Equity

• Transparency and Accountability:The firm upholds rigorous reporting standards, ensuring that both financial performance and ethical outcomes are clearly communicated to stakeholders.

Through these strategies, Steadfast Equity exemplifies how ethical principles can be seamlessly integrated into private credit investments, proving that responsible investing can coexist with strong financial returns.

Practical Tips for U.S. Investors

Investing in private credit within the U.S. comes with its own set of challenges, including navigating regulatory requirements, meeting accreditation standards, and understanding the unique financial and cultural landscape.

Accreditation Rules for Private Credit

To invest in private credit, U.S. investors must meet specific accreditation criteria. According to the SEC, accredited investors are individuals deemed to have the financial expertise and resources to handle the risks of unregistered securities. This typically means meeting one of the following:

• Income requirements: An individual must have earned at least $200,000 annually (or $300,000 jointly with a spouse) for the last two years, with the expectation of maintaining that income level.
• Net worth: Investors must have a net worth of $1 million or more, excluding the value of their primary residence.

Additionally, certain professional qualifications can grant accreditation regardless of income or net worth. For example, investment advisers, brokers, and holders of select certifications automatically qualify. To verify accreditation, issuers often require documentation like tax returns, bank statements, or even questionnaires and credit checks.

The rules surrounding fundraising methods also play a major role in how private credit opportunities are marketed. For instance, in fiscal year 2024, companies raised $170 billion under Rule 506(b), compared to $12 billion under Rule 506(c). Here’s how the two differ:

• Rule 506(b): Allows fundraising from accredited investors and up to 35 sophisticated but unaccredited investors. However, general solicitation (public advertising) is prohibited.
• Rule 506(c): Permits public advertising but restricts participation to accredited investors only.

"The accredited investor definition may define who is in their pool of potential investors, and for investors whether they are eligible to invest." - SEC.gov

Steadfast Equity, for example, takes these requirements further by tailoring its investor selection to align with its ethical investment philosophy.

Steadfast Equity's Investor Selection Process

Steadfast Equity focuses on building relationships with investors who share its values and long-term vision. Instead of solely relying on financial metrics, the firm uses a character-based approach to assess potential investors. This includes evaluating their financial behavior, ethical values, and commitment to responsible investing.

The firm emphasizes open communication about its strategies, risks, and potential outcomes. By prioritizing transparency, Steadfast Equity helps investors make decisions that align with their financial goals and risk tolerance. This approach reflects a dedication to fostering partnerships rooted in shared respect and ethical principles.

U.S.-Specific Financial and Cultural Considerations

In addition to accreditation, U.S. investors must account for unique financial and cultural factors when considering private credit investments.

Taxes are a key consideration. Income from private credit investments is generally taxed as ordinary income, which can lead to higher tax rates compared to qualified dividends or long-term capital gains. Factoring in after-tax returns is essential when comparing private credit to other fixed-income options.

The regulatory environment also plays a role. Unlike a centralized federal framework, private credit in the U.S. is governed primarily by state banking regulations. Investments are denominated in U.S. dollars, which removes currency risk. Additionally, standard documentation adheres to U.S. conventions, such as the MM/DD/YYYY date format and the use of commas in numerical formatting.

Investor behavior has shaped the growth of private credit as well. High-net-worth individuals and retail investors have driven the rise of interval funds, which have grown at an annual rate of about 40% over the last decade.

When it comes to private credit, thorough due diligence is critical. Investors should examine fee structures, risk tolerance, and tax implications carefully. As Nevenka Vrdoljak, senior quantitative analyst at Merrill and Bank of America Private Bank, explains:

"People tend to focus just on their comfort level with risk. But your to take risks based on your financial situation is just as important."

Private credit investments often provide yields 200 to 600 basis points higher than public market alternatives, depending on the credit quality. However, these returns typically come with trade-offs, such as longer investment horizons and reduced liquidity compared to publicly traded bonds. To make informed decisions, review offering documents, analyze historical performance, and regularly reassess your portfolio based on changes in your financial situation or goals.

The Future of Private Credit

Private credit is on the brink of a major evolution, transitioning from a niche investment strategy to a central component in many portfolios. Several factors are driving this growth, creating a promising outlook for investors.

Key Points for Investors

The rise of private credit is built on a few core elements. Perhaps most striking is the sheer size of the opportunity, with the potential market estimated to exceed $30 trillion across a variety of asset classes. This includes traditional corporate lending and cutting-edge sectors like artificial intelligence infrastructure and data center development.

Private credit also offers unique structural advantages, such as flexibility and the ability to build long-term relationships with borrowers - something public markets often struggle to provide. Patrick Ottersbach, Head of Private Credit, EMEA at Macquarie Capital, puts it this way:

"Through close, often multi-year relationships, we directly support borrowers on their growth journey – getting to know them, anticipating their needs and responding more quickly than public markets could."

Another important trend is the growing accessibility of private credit. High-net-worth individuals and retail investors now have more opportunities to participate in this space, which was previously dominated by institutional players. At the same time, institutions like pension funds and insurance companies are increasing their allocations, viewing private credit as a reliable income-generating strategy.

Even as interest rates may eventually decline, they are expected to remain higher than the post-financial crisis lows. This stability will help maintain the premium yields that private credit loans, such as first-lien senior secured loans, can offer. Bill Sacher, Partner & Head of Private Credit at Adams Street Partners, explains:

"Even when base rates bottom, which could be a multiyear process, they are likely to remain high relative to the post-global financial crisis lows. This should help preserve the premium yields generated from first lien senior secured private credit loans and help it to continue to compare favorably to most debt alternatives in the market."

Future Opportunities in Private Credit

Looking ahead, private credit is poised to benefit from several emerging opportunities. One of the most promising areas is technology integration. The growing demand for AI-driven infrastructure - such as data storage, processing power, and energy systems - presents a significant financing gap that private credit is well-positioned to fill.

Collaborations between traditional banks and private credit firms are also gaining momentum. For instance, Citigroup Inc. launched a $25 billion partnership with Apollo Global Management in 2024, while Wells Fargo teamed up with Centerbridge Partners in a $5 billion initiative. These partnerships highlight how banks are leveraging private credit expertise to better serve their clients.

Geographic expansion is another key growth area. In Asia, green infrastructure private credit is emerging as a major opportunity, while Europe continues to see rapid adoption. This global diversification not only broadens the market but also helps distribute risk more effectively.

Private credit providers are also becoming more specialized, focusing on complex transactions like smaller deals, distressed situations, and issuers with unique financing needs. This level of specialization improves risk assessment and pricing, benefiting both lenders and borrowers in the long run.

Steadfast Equity exemplifies this forward-looking approach with its ethical investment framework. By prioritizing long-term value creation and sustainable growth, the firm is well-positioned to seize new opportunities while staying true to its core values. Its focus on transparency and responsible investing offers a strong foundation for navigating the challenges and opportunities ahead.

The combination of structural shifts, technological advancements, and changing investor preferences sets the stage for continued growth in private credit. As Emily Bannister, CFA, Head of Private Credit at Wellington Management, and Sonali Wilson, Investment Director, note:

"As we head into 2025, we believe private credit will continue to build on this year's momentum. Crucially, as the asset class grows, it appears to be broadening its scope, with new areas of growth emerging based on structural and near-term trends."

For U.S. investors who meet accreditation requirements, private credit offers a chance to tap into this growth story while enjoying yields that remain competitive with traditional fixed-income options. The key to success will be selecting managers who combine deep market knowledge with a commitment to ethical practices - qualities that will be increasingly important as the market expands and competition intensifies.

FAQs

What is driving the rapid growth of private credit, and how is the market expected to develop by 2028?

The private credit market has been growing quickly, driven by a mix of factors. Among these are the increasing desire from investors to diversify their portfolios, the retreat of traditional banks from corporate lending following the 2008 financial crisis, and the strong attraction of private credit’s risk-adjusted returns. Together, these elements have helped private credit emerge as a fast-expanding asset class with plenty of new opportunities.

Looking ahead, the market is expected to hit $3.5 trillion in assets under management by 2028, outpacing the U.S. high-yield bond and leveraged loan markets. This surge is being propelled by the growing influence of non-bank financial institutions, the creation of innovative private credit strategies, and steady interest in alternative investments. As the sector evolves, private credit is likely to remain a core part of well-diversified investment portfolios.

What makes private credit strategies different from traditional bank lending, and why are they appealing to both borrowers and investors?

Private credit strategies offer a distinct edge over traditional bank lending by being highly tailored and adaptable. Unlike the rigid structures often associated with banks, private lenders can customize loan terms - like repayment schedules and covenants - to align with the unique needs of each borrower. This approach enables faster approvals, minimizes regulatory roadblocks, and ensures quicker access to funds. For businesses in need of immediate financing, this speed and flexibility can be a game-changer.

From a borrower’s perspective, private credit serves as a more responsive and streamlined funding solution compared to the standardized, often sluggish processes of traditional banks. On the flip side, investors benefit from the potential for greater returns, thanks to tailored risk-reward profiles and access to a broad range of industries. These qualities make private credit an attractive alternative for both borrowers and investors seeking options outside the conventional lending framework.

How is ethical investing being applied to private credit, and what methods are used to measure its impact?

Ethical investing in private credit means weaving ESG (Environmental, Social, and Governance) principles into the decision-making process. It also involves adopting impact-driven strategies and practicing responsible risk management. These efforts aim to align investments with goals that prioritize sustainability and social responsibility.

To gauge the impact of these investments, investors rely on tools like ESG factor assessments, sustainability frameworks such as the , and structured impact measurement methods. This includes detailed evaluations and consistent performance tracking, ensuring progress is monitored and accountability remains a priority in ethical private credit ventures.

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