Private Credit Is Exploding - Here’s the Chart Wall Street Won’t Show You

Steadfast Equity
Jun 21
12 min read

Updated: Jun 21

Private credit has grown from $1 trillion in 2020 to $1.8 trillion by 2024, with projections hitting $2.6 trillion by 2029. This rapid expansion is reshaping corporate lending, driven by:

Bank Lending Pullback: Stricter regulations have banks lending less, while private credit fills the gap with faster and more flexible loans.
Higher Yields: Private credit offers 10.15% yields, outperforming traditional fixed-income investments and providing inflation protection.
Private Equity Demand: A $1.4 trillion funding gap between private equity needs and available credit is fueling growth.

However, risks are emerging:

Refinancing Pressure: 50% of loans mature within 3 years, risking a liquidity crunch.
Yield Compression: Increased competition has tightened loan spreads, reducing rewards.
Portfolio Concentration: Many private credit portfolios lack true diversification, amplifying risks during economic downturns.

For ethical investors, transparency and ESG integration are key to navigating this booming yet risky market. Firms like Steadfast Equity offer diversified, ethical investment options with competitive returns.

Key takeaway: Private credit offers high returns and growth potential but requires careful risk management, diversification, and transparency to avoid pitfalls.

The Black Hole of Private Credit That's Swallowing the Economy | Odd Lots

What's Driving Private Credit Growth

Three main factors are fueling the rise of private credit and reshaping how capital is accessed. These shifts are laying the groundwork for significant changes in the financial landscape.

Changes in Bank Lending Practices

As traditional banks pull back, private credit providers are stepping in to fill the void. Stricter regulations introduced after the financial crisis have made bank lending more complicated and expensive, leaving a gap that private credit firms are eager to address. By 2024, the global private credit market reached an impressive $1.8 trillion, with banks increasingly collaborating with private credit firms instead of competing against them. For example, bank-committed credit lines to private credit vehicles have grown to around $95 billion by the end of 2024.

"The private credit market has emerged as a formidable force in the global financial landscape, offering a compelling alternative to traditional syndicated bank lending."

This shift has also led to larger private credit loans, with terms that resemble traditional syndicated bank loans. Upcoming regulations under the 'Basel III Endgame' are expected to push even more assets away from banks and into private credit. Interestingly, banks have transitioned from competitors to key partners of private credit firms, playing a significant role in the sector's growth.

Demand for Higher Yields and Stable Returns

In a world where traditional fixed-income investments often deliver modest returns, private credit has become a go-to option for investors seeking higher yields. Currently, private credit offers an impressive double-digit yield of 10.15%, with a yield premium of 226 basis points over B-rated loans - nearly double its historical average of 121 basis points since January 2021.

The floating-rate nature of many private credit deals adds another layer of appeal, as these rates adjust upward in response to rising interest rates, providing a hedge against inflation.

"Private credit is doing exactly what investors hoped it would in a year like this: providing strong, floating-rate yield and acting as a shock absorber from market volatility." - Daniel Pietrzak, Global Head of Private Credit at KKR

Private credit also demonstrates lower monthly spread volatility compared to high-yield bonds or senior secured loans. Additionally, it has a low correlation with public equity and bond markets. Over two decades, its income-based returns have consistently outperformed losses, even during periods of market stress. This yield advantage also aligns well with funding sustainable investment initiatives.

Private Equity's Role in Private Credit Expansion

Private equity firms are playing a pivotal role in driving demand for private credit. With mounting pressure to deploy capital and deliver strong returns, private equity has increasingly turned to private credit as a financing solution. By Q3 2024, there was a $1.4 trillion funding gap between private equity buyout dry powder and credit origination dry powder.

"Deal flow remains far from normalised levels but mounting pent-up demand and improving economic conditions should inject fresh impetus into the market this year." - Bill Eckmann, Head of Principal Finance and Private Credit, Americas, at Macquarie Capital

This demand is expected to grow further, with over $600 billion in performing loans set to mature by 2028, creating significant refinancing needs. Private equity firms are also employing creative financing strategies; for instance, 30% of companies in buyout portfolios have undergone liquidity events, collectively raising $410 billion through minority interests, dividend recapitalizations, and other mechanisms. This mutually beneficial relationship between private equity and private credit continues to drive growth in both sectors while ensuring efficient capital allocation.

The Chart Wall Street Won't Show You

Wall Street might be celebrating the rapid rise of private credit, but there's one chart that tells a different story - one that highlights risks often overlooked. It reveals how private credit has strayed from its original purpose, raising questions about the hidden dangers in its evolution.

Over the last two decades, U.S. private credit has grown significantly, with changes in loan structures and borrower profiles. This chart not only captures that growth but also sheds light on emerging risks that deserve closer attention.

Key Insights from the Chart

One of the most eye-opening takeaways is how private credit loans are starting to resemble broadly syndicated loans (BSLs). They’re becoming similar in terms of size, structure, and borrower characteristics. This shift suggests private credit may be moving away from its roots in specialized, relationship-driven lending - its original hallmark.

Another red flag is the narrowing of loan spreads, signaling increased competition. Over the past decade, private credit loan spreads have shrunk by about 1 percentage point, now hovering around 6 percentage points above benchmark rates. This tightening leaves lenders with less reward for the risks they’re taking on.

There’s also a looming refinancing challenge. About 50% of U.S. private credit fund loans are due for repayment within three years, with over $600 billion in performing loans set to mature by 2028. This could lead to a liquidity crunch, exposing weaknesses in credit quality.

The chart also highlights a lack of diversification in private credit portfolios. Many investors assume these portfolios are well-diversified, but the data suggests otherwise. In times of economic stress, this could result in higher-than-expected default correlations across borrowers.

Lastly, banks are increasingly exposed to private credit risks. U.S. bank exposure now totals $2.3 trillion, with major banks committing $1 billion to BDC loans. This indirect exposure ties traditional financial institutions to the risks of private credit markets.

These findings reveal why such crucial data often stays out of the spotlight.

Why Wall Street Stays Quiet

Wall Street’s silence on these trends isn’t accidental. Several factors help sustain the industry’s preferred narrative. Opaque valuations and regulatory blind spots allow risky trends to go unnoticed.

"If PC lending has grown because lenders have been making riskier loans that banks would not make, then aggregate credit risk in the financial system likely would rise." - Boston Fed researchers

Another issue is the non-traded nature of private credit loans. Unlike public markets, where pricing is transparent and updated continuously, private credit relies on internal valuations. These assessments may not reflect actual market conditions, making it harder to identify problems before they escalate.

The fee structures in private credit also play a role. Fund managers often have incentives to prioritize growth over risk management. Jim Grant, founder and editor of , cautions that "competition is likely to lead to less thorough due diligence and reduced returns. Private credit quality is weaker, almost by definition, than in the public markets".

For ethical investors, this underscores the need for transparency and rigorous due diligence. The blending of private credit with traditional banking means many investments in this area might carry risks akin to those of banks - without the same level of oversight. This is a critical factor to weigh in any responsible investment approach.

Risks and Challenges in Private Credit

The rapid growth of private credit has brought with it a set of risks that investors need to carefully consider. While private credit has consistently delivered positive returns - averaging 9.4% annually since 2010 - the market's expansion has introduced new challenges. Below, we explore how yield compression, refinancing struggles, and sector concentration amplify these risks.

Lower Yields and Rising Competition

As the private credit market grows, the competition to deploy capital has intensified, eroding yield advantages. With over $400 billion in unspent capital awaiting deployment, this race has squeezed yield premiums. By the end of 2024, private direct loan yields hovered around 11%.

"In private markets, careful selection may drive results. Investors considering private markets may want to focus their manager selection on those with experience investing through multiple credit cycles. For managers, credit selection is critical when seeking to achieve attractive outcomes and mitigating downside risk."
John Griffith III, BlackRock Managing Director

This competitive pressure has led some managers to accept riskier deals or compromise on returns. In such a landscape, experienced managers with a track record of navigating multiple credit cycles are better equipped to maintain discipline and prioritize quality over short-term gains.

Refinancing Challenges and Credit Quality Concerns

Beyond shrinking yields, refinancing hurdles are becoming a major concern. A staggering $2.5 trillion in real estate-related debt is set to mature over the next four years, creating significant refinancing pressure. Many borrowers are resorting to payment-in-kind interest or extending maturities to manage these obligations. Recovery expectations for first-lien debt have also dropped to 60%-65%, a notable decline from the historical average of 75%-80%.

Geopolitical instability and the potential for rising inflation could further strain borrowers, particularly those already under financial stress. Compounding this issue, opaque internal valuations often obscure early signs of credit deterioration. For investors pursuing ethical strategies, these refinancing risks and transparency concerns must be carefully weighed when assessing portfolios.

Sector Concentration and Vulnerability to Economic Shifts

Another pressing issue is the lack of diversification in many private credit portfolios. Heavy sector concentration leaves these portfolios exposed to economic downturns that disproportionately affect specific industries. While the addressable market for private credit spans over $30 trillion across varied asset classes, many funds remain clustered in similar sectors. By 2028, global private credit assets under management are expected to grow to $3 trillion.

"Wealth management is the last bastion of under-allocation to alts, but that is quickly changing."
John Bowman, CAIA

This concentration creates systemic risks, as loans tied to specific industries could falter simultaneously during economic stress. Investors committed to ethical strategies should look beyond surface-level diversification and assess the true resilience of their portfolios against sector-specific downturns.

How to Invest Ethically in Private Credit

As we’ve explored the risks, it’s clear that a disciplined diversification strategy can help reduce potential downsides. The encouraging news? Ethical investing in private credit is becoming more accessible. Global sustainable investments have now surpassed $30 trillion, marking a 68% increase in recent years. Here's how you can align your portfolio with your values while tapping into the growth opportunities of this expanding market.

Building Diversified Portfolios

Diversification is the cornerstone of private credit investing. Or, as Harry Markowitz famously put it, "Diversification is the only free lunch in finance". In today’s crowded private credit market, this principle is more relevant than ever.

Effective diversification means spreading investments across a range of ownership models, asset types, sectors, and geographies. Private credit can fund a variety of assets, such as transportation equipment, royalty streams, supply chains, intellectual property, receivables, and equipment leases. Right now, these "plus" sectors in private credit are delivering average spreads of over 6.5%, providing strong returns while reducing concentration risk.

Instead of focusing too narrowly on a single market segment, aim for broad sector allocation to shield your portfolio from sector-specific downturns. It’s also a good idea to discuss correlations with portfolio managers to identify and address any hidden concentration risks.

Choosing Transparent and Responsible Investments

Transparency remains a challenge in private credit. Only about 20% of private credit issuers are rated, which means investors need to dig deeper to assess risks and ensure investments align with ethical standards. In September 2023, the Principles for Responsible Investment (PRI) shared a report outlining progress in responsible investment practices for private debt and direct lending.

"ESG incorporation in private debt provides limited partners (LPs) and general partners (GPs) with additional credit risk insights throughout the deal cycle."
PRI (Principles for Responsible Investment)

When evaluating private credit opportunities, apply ESG (Environmental, Social, and Governance) criteria to assess a company’s sustainability practices. Use objective third-party providers to verify ESG scores, rather than relying solely on what fund managers present. The Financial Conduct Authority (FCA) has introduced sustainability labels for funds, categorizing them into Sustainability Impact, Sustainability Focus, Sustainability Improvers, and Sustainability Mixed Goals.

Examining sustainability risks, ethical business practices, and governance structures is essential to understanding how these factors influence long-term creditworthiness. These efforts pave the way for innovative investment solutions, including those offered by Steadfast Equity.

Steadfast Equity's Ethical Investment Solutions

Steadfast Equity offers a thoughtful approach to ethical investing by combining high-yield bond options with strategic capital deployment. Their focus on aligning with ethical principles and maintaining transparency addresses many of the challenges in private credit, such as credit quality and diversification.

The firm provides fixed-return bond options with predictable income streams. For example, their 3-Year Compounded option delivers 15.0% APY, while the 12-Year Compounded option offers 16.5% APY. These returns are competitive and avoid the opacity and refinancing risks often associated with traditional private credit structures.

Steadfast Equity’s strategic capital deployment spans a wide range of sectors, including growth-stage companies, technology, SaaS, artificial intelligence, biotechnology, real estate, and alternative investments. This broad sector exposure is critical for building a diversified and ethical private credit portfolio. Additionally, the firm carefully selects investor partnerships based on shared values, ensuring alignment between investor goals and fund management practices.

With a leadership team experienced in navigating multiple market cycles, Steadfast Equity is well-positioned to tackle today’s competitive investment landscape. For investors wanting to ethically participate in private credit growth while maintaining transparency and strong returns, their approach offers a thoughtful and effective solution.

Conclusion: Making Smart and Responsible Private Credit Decisions

The private credit market has grown dramatically, surging from $1 trillion in 2020 to about $1.5 trillion at the start of 2024 - a shift that’s reshaping modern finance. With projections estimating the market could hit $2.6 trillion by 2029, investors are presented with vast opportunities. But these opportunities come with challenges that require careful and disciplined management.

Beneath the surface of this growth lies a complex landscape. Success in private credit now hinges on three key factors: credit selection, diversification, and active risk management. As David Miller, Head of Global Private Credit & Equity, puts it:

"Amid the current economic environment, we continue to take a proactive approach, which includes closely analyzing companies' earnings and free cash-flow generation."

This highlights the importance of robust risk management, especially as market conditions evolve.

Traditional strategies are no longer enough, particularly as tariff-driven inflation raises costs for businesses, especially those relying on imported goods. To navigate these challenges, investors are turning to non-cyclical sectors like software, insurance, and residential services, which tend to maintain stronger cash flow during economic downturns.

Data-driven decision-making has also become essential in private credit investing. Unlike public markets, where standardized information is readily available, private markets demand more advanced tools to analyze data and identify trends early on. This ability to spot shifts before they gain widespread attention provides a significant edge in a market now valued at $1.7 trillion. Such precision naturally drives the need for greater transparency and more responsible evaluation practices.

Transparency and ethics are no longer optional - they’re critical for sustainable success. The relatively low visibility into individual firms’ exposures means investors must dig deeper to assess risks and ensure their investments align with responsible standards. As Ben Rockell, Managing Partner at Kingsbury & Partners, explains:

"Transparency is the cornerstone of success in private credit. Without clear documentation, structured contracts, and open communication, borrowers risk losing investor trust and credibility."

Looking ahead, balancing opportunity with responsibility will be key. Firms like Steadfast Equity demonstrate how this can be done, delivering competitive returns (10.0%–18.5% APY) while adhering to ethical principles and maintaining diversified exposure across sectors like technology, biotechnology, real estate, and alternative investments.

Moody's predicts that global private credit markets will continue to expand in 2025, fueled by lower interest rates and strong economic performance. With this trajectory, the importance of combining rigorous data analysis with ethical practices becomes even clearer. Investors who embrace this approach can build portfolios that not only deliver strong returns but also contribute to a more sustainable and resilient economy.

The rapid growth of private credit isn’t slowing down, and neither should your commitment to informed, responsible investing. By pairing data-driven insights with ethical decision-making, investors can position themselves for long-term success while fostering sustainable economic progress.

FAQs

What are the key risks of investing in private credit, and how can they be managed?

Investing in private credit isn't without its challenges. Key risks include illiquidity, which can limit your ability to quickly access funds, borrower default, where borrowers fail to meet their obligations, and a lack of transparency in the market. This lack of clarity can make it tougher to accurately assess valuations. Adding to the complexity, limited market discovery can obscure the true value of assets.

To address these risks, investors should prioritize thorough due diligence. This means carefully evaluating the quality of borrowers and scrutinizing the structure of the investments. Implementing strong compliance policies and setting up independent oversight mechanisms can also help improve transparency. These steps can go a long way in minimizing potential losses and navigating the private credit market with greater confidence.

What impact does the growth of private credit have on traditional banks and the financial market?

The private credit market is growing fast, and it’s changing how lending works by moving some of it away from traditional banks. With stricter regulations, banks are pulling back from riskier loans, leaving private credit to step in and take on that role. This shift is shaking up the financial world, reducing banks' dominance and creating a more varied lending environment.

But with growth comes challenges. If not handled carefully, the rise of private credit could make the financial system more vulnerable. While this sector offers exciting opportunities for investors, it also demands careful planning to address potential risks and ensure stability across the broader market.

How can ethical investors promote transparency and responsible practices in the private credit market?

Ethical investors play a vital role in driving transparency and encouraging responsible practices in private credit by incorporating ESG (Environmental, Social, and Governance) criteria into their decision-making processes. This begins with conducting detailed due diligence to confirm that investments align with ethical and sustainability standards.

Another key step is actively engaging with fund managers to advocate for the adoption of ESG principles and setting clear, measurable sustainability goals. Taking this proactive approach helps ensure greater accountability. Moreover, adopting a well-rounded risk management strategy allows investors to aim for profitability while also supporting long-term positive outcomes.