As traditional banks tighten lending standards in the face of rising rates, private credit is stepping in. Once a niche strategy, it has become a US$ 2.5 trillion global market, led largely by private equity firms and asset managers. This shift is not just a temporary adjustment, but more of a structural change in how capital flows through the economy, reshaping finance.
Private credit, also called direct lending, refers to non-bank institutions, mostly private equity firms, pension funds, and insurance companies, providing capital to companies. These deals typically involve floating-rate debt and fewer covenants (meaning the loan conditions or restrictions) than traditional banks demand. While this flexibility makes it attractive for borrowers, it also offers lenders higher yields, often in the 9-13% range, higher than investment-grade bonds or syndicated loans.
The boom is particularly evident in the US., Europe and India, where large buyout and infrastructure deals have been increasingly financed by private credit firms. In July, Meta began negotiating a US$ 29 billion package for its AI data centers, with over US$ 26 billion expected to come from private lenders like Apollo, KKR and Brookfield, bypassing traditional banks entirely. Such type (and size) of transaction, once the domain of bank syndicates, highlight how direct lending is scaling up to finance complex, mature operations.
Regulation and further risks
One key driver is regulation. Since the 2008 crisis, banks have faced increasingly strict capital requirements, limiting their ability to hold large loans on their balance sheets. In contrast, private lenders are not subject to the same Basel III constraints, giving them the flexibility to underwrite bigger and riskier deals, faster. For many borrowers, especially in M&A scenarios, agility and execution are more valuable than lower rates.
The problem comes in the long run. With looser terms and more concentrated exposure, private credit portfolios are vulnerable to defaults, especially if the macroeconomic scenario deteriorates. Unlike banks, private lenders don’t benefit from deposit insurance or central bank support. That said, many are trying to build diversified portfolios across sectors and geographies to mitigate risk.
Private credit seems to have come to stay. Global dry powder for private credit currently exceeds US$ 410 billion, with major players like Apollo, KKR, and Blackstone leading the industry. While bank lending may stay constrained for years, direct lending can redesign the financial market as we know it by filling this gap.
