Banking Sector Retrenchment Created Tailwinds for Private Credit

Introduction

This withdrawal—intensified by rising interest rates, tighter regulations, and persistent macroeconomic uncertainty—has created fertile ground for alternative financing models to thrive. At the forefront of this shift is private credit, a once-niche sector that has evolved into a powerful institutional asset class. As of 2023, private credit boasts more than $2.1 trillion in assets under management, not only filling the gap left by banks but also reshaping the way capital is sourced by borrowers and how investors pursue returns in an increasingly complex economic landscape.

This evolution is not merely cyclical; it represents a structural realignment rooted in shifting risk appetites, changes in capital deployment, and evolving regulatory frameworks. Traditional lenders, burdened by capital adequacy rules, liquidity requirements, and risk-weighted asset constraints, began scaling back from lending segments that demanded customized, hands-on, and often higher-risk solutions. This retreat created space for private credit strategies such as direct lending, mezzanine financing, and asset-based lending to flourish. Today, borrowers ranging from mid-market companies to large corporations are turning to private credit for faster, more adaptable funding solutions that better reflect their operational needs.

Concurrently, institutional investors—facing persistently low yields in public fixed-income markets and wary of equity market volatility—have been drawn to private credit’s appeal: floating-rate structures, downside protection, and stable income generation. This confluence of borrower demand and investor appetite has driven explosive growth. From a global market size of $500 billion in 2013, the sector has more than quadrupled, with North America capturing the majority share. Yet, as this report explores, the private credit story goes beyond scale—it's also a story of influence, innovation, resilience, and staying power.

The New Lending Order: How Bank Retrenchment Reshaped Credit Markets

The clearest sign of this systemic shift became evident following the COVID-19 pandemic. Beginning in early 2021 and accelerating through 2022 and 2023, U.S. banks significantly tightened their lending standards for commercial and industrial (C&I) loans. This trend, meticulously documented by the Federal Reserve’s Senior Loan Officer Opinion Survey, highlights a broad retreat from traditional credit provisioning. By the third quarter of 2023, over half of surveyed banks had imposed stricter lending criteria for medium and large businesses—a rare level of coordination that signals not isolated caution, but a collective, strategic withdrawal.

This recalibration stemmed from mounting inflationary pressures, intensified regulatory oversight, and concerns over depositor flight following high-profile bank collapses. As a result, banks adopted a persistent “risk-off” approach that has extended into 2025, further reinforcing private credit’s role as a central pillar in the new credit paradigm.

Crucially, this withdrawal by banks is not a short-term, defensive reaction—it marks a deeper, more permanent recalibration of credit risk exposure, particularly within commercial lending. Several structural factors are driving this shift. On the regulatory side, Basel IV and its heightened capital requirements have rendered certain types of lending less appealing from a return-on-equity standpoint. Simultaneously, the pandemic-triggered flight of deposits and the subsequent repricing of mark-to-market securities weakened liquidity positions, disproportionately affecting regional banks.

These pressures—compounded by ongoing macroeconomic instability and geopolitical uncertainty—have resulted in a lasting retreat from core lending areas such as working capital loans, acquisition financing, and even standard growth capital. Borrowers who would have readily qualified for term loans just a few years ago now encounter tighter covenants, downsized facilities, or outright rejections.

In this vacuum, private credit has emerged not as a temporary substitute, but as a strategic alternative. Backed by unregulated capital pools, agile underwriting processes, and yield-hungry investors, private credit funds have stepped in decisively. They offer what traditional banks increasingly cannot: speed, certainty, and bespoke structuring. For companies navigating unpredictable conditions, the ability to obtain a customized financing solution within weeks—rather than enduring months-long bank approvals—has proven to be a game-changer. This has catalyzed a fundamental shift in credit sourcing, from regulated banks to private funds, and from public to private lending markets.

Private Credit’s Meteoric Rise: From Niche to Necessity

The past decade has witnessed a transformative surge in private credit, elevating it from an alternative investment to a core component of institutional portfolios. From 2013 to 2023, assets under management in the private credit space expanded at a compound annual growth rate of 15%, rising from $500 billion to more than $2.1 trillion globally. North America continues to dominate, accounting for nearly 60% of this total—thanks to its robust private equity networks, sophisticated investor base, and mature financial infrastructure. However, the trend extends beyond U.S. borders. Europe has experienced even faster growth, registering a 17.3% CAGR over the same period, signaling the globalization of the asset class. These figures underscore a fundamental reconfiguration in how capital is raised, structured, and deployed internationally.

Private credit’s rapid ascent is largely attributed to its strong alignment with today’s investor objectives. In a prolonged low-yield environment, institutional allocators—pension funds, insurance companies, endowments, and sovereign wealth funds—have increasingly gravitated toward assets that deliver stable, predictable income with lower volatility. Private credit meets these demands head-on. The predominance of floating-rate structures offers a natural hedge against inflation and rising interest rates, while the illiquidity premium—once viewed as a liability—is now embraced as a pathway to enhanced returns for those willing to lock up capital.

Investor enthusiasm is further reflected in the massive buildup of undeployed capital, or “dry powder.” As of 2023, global private credit dry powder surpassed $490 billion. Far from being idle reserves, this capital represents an arsenal ready to sustain lending momentum, even amid market disruptions. The sector’s durability during recent shocks—the inflation surge of 2022 and the banking turmoil of 2023—demonstrated its resilience and growing independence from traditional financial institutions. Where banks pulled back, private credit providers stepped in, continuing to lend and support transactions.

This sustained cycle of borrower demand and investor commitment has catalyzed a self-reinforcing dynamic. What began as a complement to bank lending has now become a foundational pillar of modern credit markets—one that is likely to endure and expand in influence for years to come.

The growth of private credit has been mirrored by a dramatic rise in fundraising activity—both in volume and strategic diversity. Between 2009 and 2023, private credit fundraising grew from $36 billion to over $216 billion annually, peaking at $293 billion in 2021. Direct lending remains the dominant strategy, reflecting investor appetite for yield and control. However, asset-based lending, mezzanine, and distressed strategies have gained significant traction as allocators seek differentiated return streams and capital solutions.

This expansion reflects a broader structural embrace of private credit strategies, not just in North America but globally. Notably, the fundraising base has become increasingly institutional, signaling maturity and long-term confidence in the asset class.

Displacing Bonds and Syndicated Loans: A Structural Shift in Credit Allocation

A key signal of private credit’s growing systemic importance is its clear divergence from traditional fixed-income instruments. Since 2005, the private credit market has expanded by more than 500%, far surpassing the relatively flat growth of global high-yield bonds and broadly syndicated loans. This disparity is not a temporary market dislocation—it reflects a fundamental and lasting shift in both investor appetite and borrower behavior.

Public debt markets, long the default option for corporate financing, have become less attractive due to their inherent reliance on mark-to-market valuations, heightened volatility driven by liquidity conditions, and rigid disclosure obligations. By contrast, private credit provides a more controlled and predictable environment, characterized by contractual cash flows, covenant-heavy deal structures, and confidentiality—factors increasingly valued in uncertain economic climates.

For borrowers—particularly mid-sized companies and sponsor-backed entities—private credit offers compelling advantages: the ability to sidestep credit rating agencies, avoid poorly timed capital market windows, and negotiate directly with lenders who possess deep sector expertise. This customized approach enables firms to fine-tune their capital structures, secure longer-dated maturities, and craft covenants that better reflect the rhythm of their operations.

From the lender’s perspective, the appeal is equally strong. Private credit affords greater influence over deal terms, more attractive risk-adjusted returns, and a buffer against public market volatility. As a result, what began as a complement to public debt is now actively displacing it—signaling a structural reordering of how credit is both provided and preferred in today’s financial ecosystem.

The evolution of private credit is not only about scale and performance—it is also underpinned by a robust and increasingly sophisticated structure of financial intermediation. As traditional bank lending has contracted, a multilayered ecosystem of end investors and intermediaries has emerged to support and channel capital. Pension funds (PFS), insurance corporations (ICs), sovereign wealth funds (SWFs), and high-net-worth individuals now play a central role in capital provision, often deploying long-duration capital with a preference for predictable income.

This capital is funneled into private credit markets through intermediaries including close-ended GP/LP funds, open-ended vehicles, business development companies (BDCs), and collateralized loan obligations (CLOs). These structures enable efficient capital transformation while leveraging bank credit to amplify exposure. The result is a channel through which floating-rate, covenant-heavy loans are extended to mid-market and highly leveraged corporates. The configuration offers lenders enhanced control, borrower customization, and relative insulation from the liquidity-driven volatility of public markets.

Constructing Modern Portfolios: The Cash Flow Imperative

Institutional portfolios are increasingly evolving to reflect the structural reordering of capital markets. The traditional 60/40 equity-to-bond allocation is giving way to more income-oriented, resilient strategies that emphasize stability and consistent cash flow. In this context, private credit has emerged as a natural fit. Allocating even 10% of a portfolio to private credit—offset by a corresponding reduction in bond exposure—can enhance long-term returns while reducing volatility during market stress.

Unlike equities or public debt, private credit delivers steady, contractual yields that act as a cushion in inflationary periods, during central bank tightening cycles, or amid equity market downturns. Its performance is less influenced by daily mark-to-market fluctuations, making it particularly well-suited for long-term investors seeking predictable income and capital preservation.

A Compelling Risk-Return Profile Across Cycles

Across various market cycles, private credit has consistently outperformed leveraged loans and high-yield bonds in terms of internal rate of return. What truly distinguishes it, however, is its favorable risk-adjusted profile. Most direct lending transactions are senior-secured and structured with robust covenants, providing a built-in layer of protection for investors.

Even through periods of elevated interest rates and economic uncertainty—such as 2022 and 2023—private credit proved its resilience, outperforming not just on an absolute return basis but also on a risk-adjusted scale. This combination of stability, income, and downside mitigation makes private credit a powerful tool in building modern, forward-looking portfolios.

This superior performance is borne out in long-term comparative analyses. Over 10-, 15-, and 20-year horizons, private credit IRRs have consistently outperformed public loan PME (Public Market Equivalent) benchmarks and high-yield bonds. At the 15-year mark, private credit posted an IRR of 11.7%, compared to 8.0% for public loans and 9.7% for high yield. Even over shorter horizons, private credit retains a 300–400 basis point edge. This reinforces private credit’s reputation as a vehicle capable of delivering outsized returns while maintaining structural resilience—particularly in times of dislocation.

Breaking down private credit returns by strategy further illustrates its appeal across varying market environments. Distressed and mezzanine strategies, while higher risk, have offered standout returns—particularly in 2021, when distressed credit delivered a 21.6% return. In contrast, more conservative senior strategies provided stable yet competitive outcomes. Importantly, even during turbulent periods such as 2022, private credit outperformed traditional fixed-income benchmarks, underscoring the asset class’s ability to navigate volatility and economic contraction.

Decoding the Capital Stack: Structures and Sectoral Dynamics in Private Credit

The structural makeup of private credit deals across industries offers deep insight into the asset class’s resilience and versatility. At the core of this strength is the dominance of secured lending—a strategy centered on capital preservation and steady yield generation. Recent data shows that secured loans account for approximately 55.8% of private credit transactions. This approach is especially prevalent in sectors such as industrial machinery (63.5%), healthcare (57.4%), and IT infrastructure (50.2%)—industries marked by substantial capital investment and the presence of tangible assets suitable for collateralization. Secured lending provides a senior position in the capital stack, offering investors enhanced protection during downturns and shielding them from deeper losses in default scenarios.

Yet, private credit’s reach extends well beyond senior-secured structures. Mezzanine financing—subordinated to senior debt—makes up a notable 25.7% of the market. These instruments serve investors aiming to capture higher yields while avoiding the full risk of equity exposure. Mezzanine financing is particularly prominent in the software sector, where it comprises 30.5% of private credit deals. This is logical given the sector’s asset-light nature and high levels of recurring revenue, which make mezzanine capital an effective way to achieve attractive risk-adjusted returns.

Bridging the gap between senior and mezzanine layers is the unitranche structure—a hybrid model that blends senior and subordinated debt into a single facility. Unitranche loans streamline the borrowing process by removing the inter-creditor complexities of traditional multi-layered arrangements. While representing just 7.1% of deal flow across all sectors, unitranche financing is significantly more common in software (22.4%) and healthcare (11.0%)—two sectors often backed by private equity and requiring flexible, growth-oriented capital solutions. This structure allows for tailored amortization schedules and covenant terms, aligning financing more closely with operational realities.

The remaining 11.6% of deals fall into the “Other” category, encompassing non-traditional instruments such as payment-in-kind (PIK) toggles, preferred equity hybrids, and revenue-based financing. IT infrastructure stands out in this group, with 20.6% of its private credit volume structured using these innovative formats. This reflects the sector’s evolving nature, where predictable long-term cash flows from services like SaaS, cloud hosting, and data centers support financing arrangements outside conventional term debt models.

Collectively, this structural diversity underscores the adaptability of private credit. Unlike traditional bank loans or public debt instruments—where standardized terms often constrain flexibility—private credit allows for customized deal structuring tailored to both borrower profiles and investor mandates. By optimizing the capital stack on a case-by-case basis, private credit managers not only enhance potential returns but also affirm the asset class’s pivotal role in shaping modern capital formation.

Defaults and Credit Performance: Comparing Sponsored and Non-Sponsored Loans

Private credit continues to demonstrate stronger credit performance relative to public market counterparts, with default rates notably lower—especially in sponsor-backed deals. Loans supported by private equity sponsors tend to benefit from active governance, prompt intervention, and access to additional capital during periods of distress. Consequently, default rates for sponsored loans fell below 2.5% as of 2023, whereas non-sponsored loans experienced significantly higher defaults, exceeding 7%.

Recovery rates across instrument types further underscore the relative strength of private credit structures—particularly those involving secured lending. Over a 36-year period (1987–2023), secured bonds have delivered significantly higher mean and median recovery rates than unsecured counterparts across both middle-market and larger companies. Median recoveries for secured bonds in large companies reached 72%, compared to just 41.1% for unsecured debt. This highlights the critical importance of seniority and collateralization in shaping private credit outcomes, especially in distressed scenarios.

Sizing the Opportunity: A $30+ Trillion Addressable Market

Although private credit has surpassed $2.1 trillion in assets under management, its current scale represents just a fraction of its broader potential. As of 2024, the total outstanding lending volume across U.S. financial markets is estimated at approximately $34 trillion. This figure spans bank and nonbank lending across various asset classes—including commercial real estate, infrastructure, corporate finance, consumer credit, and securitized products. Within this vast credit universe, private credit’s share remains relatively small, signaling significant headroom for future expansion.

A closer look at sector-specific data reveals several immediate opportunities. In commercial and corporate lending—which accounts for around $5.7 trillion in outstanding credit—nonbank institutions already provide roughly $1.8 trillion, nearly one-third of the market. This signals not only meaningful displacement of traditional lenders, but also a strong base from which private credit can further scale. Likewise, in the $4.6 trillion commercial real estate space, $1.5 trillion is already funded by nonbank entities. As regional banks pull back due to interest rate risks and uncertain asset valuations, private credit funds are well-positioned to fill the gap.

Infrastructure finance stands out as one of the most underpenetrated segments. Of the $300 billion in current lending volume, nearly all comes from banks. This highlights a significant opportunity for private credit—especially as demand accelerates around public-private partnerships, ESG initiatives, and energy transition projects. With the right structures, such as long-duration mezzanine debt or tailored green finance vehicles, private credit can increasingly support this capital-intensive sector as banks reduce their exposure.

Consumer finance is another area ripe for disruption. With over $9.2 trillion in total lending—and $1.9 trillion already handled by nonbank providers—the space is both massive and fragmented. Growth in non-traditional lending models, such as buy-now-pay-later platforms, point-of-sale financing, and non-prime credit, is creating fertile ground for private capital. As fintech platforms and alternative underwriting methods gain traction, private credit funds are stepping in to support innovation where banks remain constrained by regulation and risk aversion.

Lastly, securitized products—including CLOs, ABS, and MBS—comprise $12.1 trillion of the U.S. credit market. While these markets remain largely public and highly regulated, private credit managers are increasingly involved in originating and warehousing loans, and even structuring bespoke tranches. This vertical integration blurs the lines between securitization and direct lending, allowing private credit players to extract value across multiple layers of the capital stack.

All told, the U.S. credit landscape presents a $30–34 trillion total addressable market for private credit. Even a modest increase in market share—just 10% across key segments—could translate into $3–4 trillion in additional assets under management, more than doubling the size of the current private credit market. As banks continue to grapple with regulatory burdens, capital constraints, and structural inefficiencies, private credit is not just poised to grow—it is positioned to become a permanent and foundational element of the modern credit system.

The maturity profile of performing loans offers insight into the upcoming capital rollover cycles and refinancing needs. As of 2025, over $1.4 trillion in outstanding private credit loans are expected to mature between 2028 and 2030 or later, with a notable $545 billion due in 2028 alone. This ballooning maturity wall presents both a risk and an opportunity: borrowers will need flexible, customized refinancing solutions, while private lenders are uniquely positioned to step in—especially in a landscape where banks remain hesitant.

Conclusion: Private Credit as the Foundation of a New Credit Era

The retreat of traditional banks from core lending activities has done more than tighten credit conditions—it has redefined how capital is sourced and structured. In its place, private credit has risen not just as a replacement, but as an increasingly preferred solution. It provides borrowers with tailored, flexible financing; offers investors enhanced yields with downside protection; and gives institutional allocators greater precision in managing cash flows and risk exposure.

As we move through 2025, private credit can no longer be considered a niche or alternative asset class. It has become a central pillar of the modern credit system—integral, influential, and enduring. The question is no longer if the market will expand, but how rapidly it will scale to meet demand. With abundant undeployed capital, growing borrower appetite, and a diminished banking presence, the conditions are set. Private credit is not a temporary shift—it is the new status quo.

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