Why Private Credit Is Running Circles Around Banking
- Steadfast Equity
- Jun 11
- 9 min read
Updated: Jun 17
Private credit is reshaping the financial landscape, offering faster access to funds, tailored solutions, and higher returns compared to banks. With the market growing from $375 billion to over $1.6 trillion by 2023, businesses and investors are increasingly turning to private credit as banks reduce lending. Here's why:
- Speed: Private credit approvals take 4–8 weeks, far quicker than traditional banks.
- Flexibility: Custom loan terms cater to unique borrower needs, unlike rigid bank loans.
- Higher Yields: Private credit delivers better risk-adjusted returns, often outperforming bonds and loans.
- ESG Alignment: Lenders can incorporate environmental, social, and governance goals.
Quick Comparison
Aspect | Private Credit | Banking |
Flexibility | Custom terms, tailored deals | Standardized, rigid terms |
Speed | Faster approvals (4–8 weeks) | Slower, bureaucratic processes |
Returns | Higher yields (7–9%) | Lower yields (around 3%) |
Risk Management | Close borrower relationships | Standardized risk assessments |
Liquidity | Long-term commitments, less liquid | More liquid, deposit-based funding |
Regulatory Burden | Fewer constraints | Heavily regulated |
Private credit is ideal for businesses needing speed and flexibility or investors seeking higher returns, while banks remain reliable for standardized, lower-risk financing.
How Private Credit Became One of the Hottest Investments on Wall Street
1. Private Credit
Private credit has become an increasingly popular financing option, offering solutions that overcome many of the hurdles associated with traditional banking. Its tailored approach and unique structure have made it a go-to choice for businesses across various industries.
Flexibility
One of the standout features of private credit is its ability to offer flexible, customized financing solutions. Unlike traditional banks, which often follow rigid, standardized terms due to regulations and internal policies, private credit lenders have the freedom to create deals that meet the specific needs of borrowers. Key loan terms can be negotiated directly between the borrower and the lender, making it an attractive option for companies facing challenges like ratio tests or those requiring creative financial arrangements. This personalized approach not only provides tailored solutions but also speeds up the process of accessing capital, which can be critical in time-sensitive situations.
Access to Capital
Private credit is known for its quick access to funds, often outpacing traditional banks. The approval process typically takes just four to eight weeks, a significant improvement over the longer timelines associated with conventional banking. For businesses needing to seize opportunities or address urgent financial needs, this speed can be a game changer. While private credit financing may come with a premium - sometimes as much as 400 basis points above the rate for publicly funded transactions - many borrowers consider it a worthwhile trade-off for the added speed, flexibility, and certainty. This efficiency makes private credit a competitive option for businesses aiming to secure reliable funding quickly.
Risk-Adjusted Returns
Private credit has demonstrated strong risk-adjusted returns, making it an appealing alternative to traditional fixed-income investments. Historically, it has performed well across varying interest rate environments while maintaining lower volatility. A key advantage lies in its structure: floating-rate coupons that adjust periodically help offset duration risk during rising interest rate periods. Additionally, private credit avoids the daily price fluctuations seen in publicly traded securities, and its bilateral agreements with strict covenants help manage borrower risk, contributing to more stable performance over time.
Alignment with ESG Principles
Private credit also supports socially responsible investing by allowing lenders to incorporate environmental, social, and governance (ESG) principles into their agreements. By securing investments with borrower assets, lenders can reduce default risk while encouraging responsible business practices. The ability to negotiate specific terms further enables private credit providers to align funding with ESG objectives. The market for private credit has experienced rapid growth, nearly tripling in size over the past decade to an estimated $2 trillion, with projections suggesting it could reach $2.6 trillion by 2029.
2. Traditional Banking
Traditional banking has long been a dependable source of financing, but its rigid frameworks and strict regulations have started to show their age. While banks still play a vital role in the financial ecosystem, their conventional models often fall short for businesses seeking more adaptable and personalized financing options. Let’s take a closer look at the challenges traditional banks face in terms of flexibility, speed, performance, and alignment with ESG principles.
Flexibility
Traditional banks operate under tight regulatory constraints and strict risk policies, which limits their ability to offer customized loan solutions. Instead, they often provide standardized terms that cater primarily to large, well-established companies. This leaves mid-market firms and businesses with unique needs at a disadvantage. On top of that, regulatory frameworks restrict the types of loans banks can issue, further narrowing the range of options they can offer borrowers.
Private credit, in comparison, has emerged as a more flexible alternative, offering tailored solutions that banks simply cannot match. The situation is expected to become even more restrictive for banks with the implementation of Basel III endgame capital requirements, which will likely reduce their ability to lend to higher-risk clients.
Access to Capital
One of the biggest drawbacks of traditional banking is its slow and bureaucratic lending process. Multiple layers of approval and extensive paperwork often delay access to capital, which can be a major hurdle for businesses needing quick funding. By contrast, private credit providers are known for their faster turnaround times.
This efficiency has made private credit increasingly competitive. Since 2020, private credit has funded more leveraged buyouts than the syndicated loan market, signaling a shift away from the traditional banking model, which has long relied on fees from syndicated loans. Businesses are clearly gravitating toward lenders that can deliver capital quickly and efficiently.
Risk-Adjusted Returns
Traditional banking products tend to focus on lower-risk investments, which often come with lower yields. This cautious approach is largely driven by regulatory capital requirements, but it doesn’t always align with investors’ expectations - especially during periods of low interest rates. As a result, many investors are turning to private credit and other alternatives that offer better risk-adjusted returns.
For example, direct lending funds have consistently outperformed high-yield bonds and syndicated loans during periods of rising interest rates. They’ve also demonstrated stronger Sharpe ratios, making them an attractive option for yield-seeking investors.
Alignment with ESG Principles
When it comes to integrating environmental, social, and governance (ESG) principles, traditional banks face significant challenges. Historically, their focus has been on maximizing shareholder returns, which can sometimes conflict with evolving ESG standards. For instance, sustainability-focused banks allocate up to 75% of their assets to the real economy, compared to just 40% for conventional banks.
This gap is becoming a key factor for customers. Deloitte’s research shows that 28% of banking customers have switched providers or products based on sustainable offerings.
"The meaning of 'ESG' has changed over time...Several years ago, some people began to equate ESG with specific political views."
- Chris Fidler, head of Global Industry Standards, CFA Institute
Despite these challenges, many banking executives see the value in sustainability initiatives. In fact, 76% believe these efforts enhance their organization’s reputation among investors and analysts. However, integrating ESG principles into traditional banking operations remains a complex and ongoing effort.
Advantages and Disadvantages
When weighing private credit against traditional banking, each option comes with its own set of benefits and challenges. For businesses seeking financing or investors aiming for strong returns, understanding these differences is key to making informed decisions.
Aspect | Private Credit | Traditional Banking |
Flexibility | Offers tailored structures, flexible repayment terms, and customized covenants | Standardized loan products with rigid terms and limited options |
Speed of Execution | Faster deal closures with predetermined pricing | Slower processes due to multiple approval stages |
Returns | Higher yields, typically ranging from 7%–9%, compared to 3% for investment-grade bonds | Lower yields due to regulatory limits and conservative risk policies |
Risk Management | Close borrower relationships allow for deeper insights and proactive management | Relies on standardized risk assessments with limited ongoing interaction |
Liquidity | Requires long-term capital commitments, reducing liquidity | More liquid, supported by a deposit-based funding model |
Regulatory Burden | Operates with fewer regulatory constraints, allowing greater flexibility | Heavily regulated, ensuring oversight and consumer protections |
Market Sensitivity | Less affected by interest rate changes, often featuring floating-rate structures | More exposed to market volatility and rate fluctuations |
These distinctions shape the performance and risk profiles of each approach. For example, during periods of high interest rates from 2008 to 2023, direct lending achieved average returns of 11.6%, outperforming leveraged loans (5%) and high-yield bonds (6.8%). Additionally, during the COVID-19 pandemic, direct lending sustained minimal losses of 1.1%, compared to 1.3% for leveraged loans and 2.2% for high-yield bonds.
Private credit's relationship-driven model offers significant value to borrowers through speed and personalization. Patrick Ottersbach, Head of Private Credit, EMEA at Macquarie Capital, highlights this advantage:
"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."
However, private credit's reliance on long-term capital commitments limits liquidity. While this illiquidity premium contributes to higher returns, it also restricts investor flexibility.
Traditional banking, on the other hand, thrives on stability and regulatory oversight. Banks provide predictable, standardized products backed by federal insurance and established consumer protections. Mark Rowan, Apollo CEO, emphasizes the broader impact of traditional banking:
"Every time you move something out of a banking system, you de-lever the system."
That said, the limitations of traditional banking have become more apparent as market dynamics evolve. The speed and flexibility of private credit have driven its growing appeal. Direct lenders commanded a 64% share of buyout loan volume in 2023 and approximately 57% in the first half of 2024, up from around 49% in 2022.
The choice between private credit and traditional banking ultimately hinges on individual needs, risk tolerance, and investment timelines. Private credit is ideal for those seeking tailored solutions, quicker execution, and higher returns, while traditional banking remains a dependable option for standardized financing and risk-averse borrowers prioritizing regulatory safeguards.
Final Thoughts
Private credit has emerged as a powerful alternative to traditional banking, offering speed, flexibility, and higher returns. With the global private debt market valued at over $1.8 trillion and projected to hit $2.64 trillion by 2029, it’s clear that capital markets are undergoing a significant shift.
Over the last decade, private credit has consistently delivered an average yield premium of 4.2% over public credit. It has also outperformed leveraged loans and high-yield bonds in terms of both returns and lower volatility since the global financial crisis. When markets faced turbulence in 2023, private credit managers stepped in to fill the gap left by banks, which had pulled back on lending.
For borrowers, private credit offers a clear edge. With an average loan size exceeding $80 million since 2022, it provides customized financing solutions and faster approval processes. Unlike traditional banks, private credit allows companies to sidestep rigid lending criteria and lengthy approval timelines, giving them access to capital tailored to their unique needs.
Investors, on the other hand, need to focus on partnering with managers who have multi-cycle expertise, robust underwriting practices, and access to strong deal pipelines. This approach is essential for navigating the complexities of private credit and achieving attractive, risk-adjusted returns.
The integration of ESG principles into private credit adds another layer of opportunity. With sustainable investing assets reaching $35.3 trillion in 2020 and $1.2 trillion in impact investing assets under management, private credit enables investors to engage with borrowers on sustainability initiatives while benefiting from the illiquidity premium.
Beyond financial returns, private credit plays a meaningful role in driving economic growth. In 2022 alone, it supported 1.6 million jobs, contributed $137 billion in wages and benefits, and added $224 billion to GDP. This highlights how private credit creates value not just for investors and borrowers but also for the broader economy.
While traditional banking will continue to serve standardized, lower-risk lending needs, private credit is thriving in areas where flexibility, speed, and customization are key. This evolution in financing reflects the trends covered throughout this article. For those seeking higher yields, better risk-adjusted returns, and the chance to support innovative companies fueling economic growth, private credit is shaping the future of finance.
FAQs
Why is private credit faster at providing funding compared to traditional banks?
Private credit stands out for its speed in delivering funding, often wrapping up the approval process in just 4 to 8 weeks - much faster than traditional banks. This efficiency comes from simplified procedures, fewer regulatory barriers, and a focus on tailored financing solutions designed to meet specific business needs.
What sets private credit apart is its emphasis on cash-flow-based and asset-backed loans. These types of loans are easier to evaluate and approve quickly. The result? Businesses get the capital they need without frustrating delays, making private credit a go-to choice for companies aiming to grow efficiently.
What are the risks of investing in private credit compared to traditional banking?
Investing in private credit comes with its own set of risks, quite different from what you might encounter with traditional banking. One major factor to think about is liquidity. Private credit investments are typically illiquid, meaning you can’t quickly sell them or turn them into cash if you need money in a pinch. For investors who prioritize flexibility, this could pose a real challenge.
Another consideration is the limited regulatory oversight in this space. Unlike traditional banks, private credit operates under fewer regulations. This can lead to higher risks, including defaults and less transparency about the financial health of borrowers. While private credit can offer the chance for higher returns, it often comes with greater risk exposure, such as significant losses if borrowers fail to repay their loans.
Given these risks, it’s crucial to approach private credit with thorough research and a long-term perspective to ensure it aligns with your financial goals.
How does private credit support ESG goals, and what benefits does this bring to borrowers and investors?
Private credit plays a key role in advancing Environmental, Social, and Governance (ESG) goals by incorporating ESG factors into both investment strategies and borrower agreements. This process often includes assessing a borrower's sustainability efforts and tying financing terms to specific ESG achievements. A prime example is sustainability-linked loans (SLLs), which adjust interest rates based on how well borrowers meet measurable ESG targets. This approach not only incentivizes better practices but also rewards progress with financial benefits.
For borrowers, adhering to ESG standards can result in lower borrowing costs, improved efficiency in operations, and a stronger market reputation. On the flip side, investors gain the advantage of aligning their portfolios with ethical principles while tapping into the rising demand for sustainable finance. This alignment can potentially lead to better long-term returns and lower investment risks.
