Private credit – a star that burns bright

As of early 2025, total assets under management (AUM) are estimated to be between $1.7 trillion and $1.8 trillion, and are forecast to reach $2.6 trillion by 2029 according to Morgan Stanley. Part of the reason for this significant growth is the rising popularity among corporations, both large and mid-sized, to seek out alternative financing solutions, cognisant of the speed and bespoke capabilities that direct lending fund managers can offer.

Private credit has become the dominant asset class over the last two or three years.

As was explained during a Private Markets & Alternatives session at IMpower FundForum, there is five times more private equity dry powder than private credit dry powder.

Consequently, deal volumes are anticipated to remain robust, as private equity sponsors turn to private credit to finance buyouts as well as support acquisition growth of existing portfolio companies.

While direct lending is regarded as the core component of private credit, regulatory pressures on banks are prompting significant growth opportunities in areas such as synthetic risk transfer (SRT) and asset-backed lending (anything from aircraft leasing to machinery and music/film royalties); indeed, the latter is regarded as the next frontier of growth within private credit.

According to McKinsey, the total addressable private credit opportunity is over $30 trillion globally, with asset-backed finance representing a substantial portion of this set as private credit managers expand beyond direct lending strategies.

In Europe, direct lending offers plenty of deal diversity given the fragmented nature of European markets relative to the US. Much of the market is highly bifurcated, with a handful of global private credit managers dominating large-cap lending, and a highly competitive field of lenders competing to originate loans to the thousands of European businesses in the middle-market.

Putting capital to work

Having well developed, extensive networks in place, as well as boots on the ground, are vital to European direct lenders as they seek to put capital to work. In that respect, the quality of the manager’s origination engine is a key point of differentiation as they compete for investment dollars, Some of Europe’s leading middle-market direct lenders typically focus their attention on established markets such as the UK, Germany, France and the Nordics where deal pipelines remain strong.

Disciplined underwriting, a conservative use of leverage in the fund and an adherence to strict loan documentation are cited as key attributes, as lenders seek out the most attractive businesses.

The general investment philosophy when lending to stable, high-quality borrowers who aren’t overly stretched from a debt/EBITDA perspective, is to generate solid but not spectacular returns.

"We favour good performing core mid-market companies. Our sweet spot is somewhere between EUR10 and EUR40 million of EBITDA. When you match those type of businesses with appropriate leverage and really tight documentation, what we"ve seen over time is that it translates to lower losses."

Managing Director and Portfolio Manager of a global asset manager remarked.

Like real assets, private credit’s value proposition to private wealth investors is that gives them access to the real economy in Europe, providing a unique opportunity to build exposure to mid-market private companies that are, to boot, typically already backed by private equity sponsors. This provides an extra layer of reassurance as the sponsors will have already conducted extensive due diligence prior to the purchase.

In short, private credit managers have a clear mission: building portfolios of loans focused on resilient businesses, which, for the most part, are stable and growing over time.

"The discussions we have with wealth advisors are not too different from the discussions we have with institutional investors. But you need to provide additional content, additional case studies that make (private credit) more easily digestible for their end clients."

Partner and Co-Head of Private Credit Solutions, Swiss-based asset manager.

Overwhelmingly, industry experts remain confident the asset class will continue to grow. Although it was stressed that continued scrutiny on downside protection will be necessary. Having navigated Covid-19, the war in Ukraine, and profited from a higher interest rate environment, private credit firms are sitting at a unique juncture – one that is poised for even greater capital deployment across ABF as the industry further matures and banks retrench.

This is a proven asset class and a trusted alternative finance partner to the global private equity community.