Private debt is gaining increasing ground within alternative financing. Over the past 10 years, its size has quadrupled. Growth expectations remain high, particularly in Southern Europe, despite some isolated cases of fraud in the U.S. Experts rule out systemic risks and explain the key drivers behind its quiet but unstoppable rise.
Despite recent headlines about fraud cases in the private financing space in the U.S., these isolated episodes represent an insignificant share of a market that has continued to grow relentlessly. In the past decade alone, assets under management in private credit have nearly quadrupled, rising from $500 billion to close to $1.7 trillion expected this year, according to Preqin. The financial analytics firm forecasts a growth rate close to 10% (CAGR), reaching $2.64 trillion by 2029.
And this momentum in private credit still shows no signs of peaking. At BlackRock, executives argue that there is substantial room for demand for private debt as a sizeable and scalable asset class for a broad range of long-term investors. Globally, private credit AUM accounts for just 10% of the alternative investment universe, which totals $16.4 trillion.
Several levers are driving the quiet rise of this alternative form of financing. On the one hand, new players have stepped in to fill the gap left by the retrenchment of bank lending, for two main reasons. The first relates to regulation, in two directions: the increase in capital requirements imposed after the systemic financial crisis, which has tightened credit conditions, and “regulatory constraints that reduce banks’ ability to offer competitive solutions,” notes Ignacio Marqués del Pecho, partner in charge of Arcano Debt & Capital Solutions. The second factor is the consolidation of the sector itself, which has reduced the number of institutions and “makes it more difficult to structure a syndicated loan,” he adds.
At the same time, the corporate sector is increasingly relying on these bespoke solutions, which are faster to secure. “Private credit is a tailored suit: it fits better, although it is obviously more expensive than the standard option offered by banks. But if you are under time pressure—because you are pursuing an acquisition or facing a capex opportunity—it makes sense to pay more (Euribor + 6.5%–7%) in exchange for that flexibility,” explains Alexandre Bruyelle, partner in Asset Management at Arcano Partners.
Another key factor is the strong investment appetite of insurance companies. According to Bloomberg, 93% of 463 senior insurance executives surveyed by BlackRock expect to increase their exposure to private assets in the coming months, with private credit as the preferred option. This is hardly surprising: private credit is particularly attractive as it has capital consumption almost equivalent to investment-grade assets due to its floating-rate nature, but offers high-yield-like returns.
For Manuel Mendivil, CIO of Arcano Partners’ Asset Management division, the main driver behind the rise of private credit is investors’ growing interest in its illiquidity premium. “Returns on liquid public assets have declined, while private credit continues to offer attractive returns, compensating for lower liquidity and becoming an increasingly appealing alternative for allocating capital.”
The U.S.-based Cliffwater Direct Lending Index (CDLI) delivered a return of 11.3% in 2024 and an annualized return of 9.3% over the past decade, significantly outperforming high-yield bonds (5.9%), according to data compiled by consultancy South Sigma. Last year, the average high-yield return was just over 8%. Market consensus around equities suggests that, after three years of strong performance and apparent immunity to geopolitical tensions, a correction may come sooner rather than later.
Beyond higher return potential, Morgan Stanley highlights private credit’s diversification benefits, which help reduce portfolio volatility and improve risk-adjusted returns. Other experts also point to shorter effective investment horizons: although loans to portfolio companies typically have maturities of around 5.5 years, their average life tends to shorten to about 3.5 years. “Given that traditional banking is offering such low returns, private markets are always an alternative. In a good portfolio, the more diversification, the better,” adds Javier Díaz Jiménez, Professor of Economics at IESE Business School.
In this context, Europe—and particularly Southern Europe—offers significant potential. “European private credit is increasingly becoming a credible alternative to syndicated loan markets. What was once a market dominated by financings below €100 million now frequently sees transactions exceeding €500 million,” notes Morgan Stanley in a recent report highlighting the region’s “high growth potential relative to the United States,” where more than 75% of transactions are financed with private debt, compared with 50% in Europe.
Moreover, “the growing urgency for the European Union to increase spending on critical infrastructure will lead to private credit being used more frequently to bridge financing gaps,” Moody’s notes in another analysis.
The recent bankruptcies of Tricolor Holdings and First Brands in the U.S. have heightened concerns among some investors, particularly stateside, fueling voices suggesting that a bubble may be forming around private credit, with potential systemic risk.
Tricolor, a subprime auto lender, pledged the same collateral multiple times to secure bank credit lines and included a loan securitization that has generated losses even in investment-grade tranches. Meanwhile, automotive components supplier First Brands engaged in similar practices involving duplicate invoices and factoring. The company raised financing in both the U.S. and European direct lending and syndicated loan markets.
“In both cases, this is a matter of poor corporate practices and fraud, not a failure of the financial system or securitization structures—although it does point to insufficient due diligence,” reassures Mendivil, who views these bankruptcies as part of a “natural and healthy cleansing” within a growing market.
Díaz Jiménez agrees that these events are “part of the equilibrium” of the financial system. “Of course, there is inherent risk in every credit decision,” he adds, “and when asset valuations in general are rising so sharply, there is an incentive to leverage. Yes, there is credit risk, but singling out private credit, private banking, or shadow banking misses the point.”
Companies turning to private debt are typically SMEs with EBITDA between $3 million and $100 million, and most lack a credit rating, according to a study on private capital markets by Spain’s National Securities Market Commission (CNMV).
More than 90% of debt issuers are backed by private equity firms, and according to McKinsey & Co, 80% of middle-market transactions have been financed through private loans.
Market participants emphasize the runway private credit still has compared with private equity, which it is following in terms of growth and structural sophistication. There are debt funds targeting different stages of corporate growth; some specialize by geography, others by sector. Secondary transactions are also taking place.
Two clear trends stand out. The first is that credit funds are becoming increasingly large. The second relates to more creative solutions, combining debt and equity and tailored precisely to borrowers’ needs.
The prevailing view among analysts and professionals is that the rise of private debt—whether quietly or with occasional noise—is not a passing trend. Over time, the different variations of this tailored suit will continue to adjust, as companies and investors grow ever more comfortable wearing it.
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