Private credit markets: a trend of competition and convergence

Competition between private credit and traditional lenders

Competition between private credit lenders and traditional lenders has created an attractive environment for borrowers, and we expect these trends to continue into 2025.

Private credit lenders—a broad range of non-bank lenders, including funds and business development companies—have seen a large influx of investments and are actively looking for deals to put invested capital to work. Given their large pools of dry powder, private credit lenders have increasingly offered tighter pricing and looser covenant packages, and sought to enter a wider range of deal types and sizes.

Private credit lenders have always had certain advantages compared with other lenders. Namely, they are largely insulated from market volatility and are not subject to capital regulations. Accordingly, they have been able to offer borrowers deal certainty, additional committed capital (such as flexible delayed draw term loans to fund future acquisitions), quick execution and often higher leverage levels than traditional lenders—features that are particularly attractive to private equity firms and other borrowers with an acquisitive growth strategy.

Public market impact on private credit deals

On the other hand, private credit has in the past had lower ceilings on deal size, higher pricing and tighter covenant packages than some traditional lenders, particularly in rosier periods for public markets.

Recent months are an example of an attractive public market period. As pricing has gone down in the broadly syndicated market, we have seen a flurry of broadly syndicated loans (including refinancings of private credit loans). Private credit lenders have responded with more attractive pricing and looser covenants. So, we are in a period of intense competition for deals, which has created an attractive environment for borrowers.

Convergence between private credit and traditional lender markets

At the same time (and likely due in part to this competition), we are seeing increased convergence between the private credit and traditional lender markets. The delta between terms in the two markets has decreased, both in terms of covenant packages and pricing. Private credit lenders have also demonstrated the ability to finance large deals, sometimes by joining together in a club with other lenders.

There is another form of convergence as banks seek to work with private credit lenders in several different ways. Banks have traditionally lent to private credit funds, so their fund financing loans are indirectly funding private credit loans to borrowers. Recently, banks have also formed various joint venture and partnership agreements with private credit lenders. These arrangements can help private credit funds access some of the traditional advantages of banks—such as offering cash management services and letters of credit to borrowers—while also accessing a deeper pool of potential borrowers. Banks gain access to potentially higher returns of private credit. Private credit funds have also worked with life insurance companies, a source of capital that is always looking for additional investments to deploy capital to match their insurance coverage liabilities. The investments of banks and life insurance companies in private credit may attract additional regulatory scrutiny at some point, given the added connectivity of the sector to the broader financial sector.

Private credit lenders have also greatly expanded their scope in an effort to deploy capital and are active in areas like asset-based loans, infrastructure loans, and commercial and residential real estate, as well as traditional corporate lender and acquisition financing. The expanding range of asset classes and products offered by private credit are another example of competition and convergence with traditional lenders. Areas with the potential for higher returns or longer terms are well suited for private credit structures, and we expect the scope of their reach to continue to increase in the year ahead.