Q3 | Torys QuarterlySummer 2024

Private credit market: latest trends and election forecast

The private credit market, characterized by non-bank lending to private companies, has remained strong and continues to grow despite pessimistic forecasts in a high interest rate environment. In this article, we examine the latest trends in this sector and assess the potential impact of the upcoming presidential election on its trajectory.

Three trends in the private credit market

  1. Increased demand for private credit: One of the most notable trends is the surging demand for private credit. Private lenders face less regulatory scrutiny than traditional banks, and they are generally faster to act and more flexible in terms of structuring, leverage levels, deal certainty, collateral and other terms. The private credit market traditionally served borrowers that were not big or mature enough to access the syndicated loan or corporate bond markets. However, we have increasingly seen borrowers that could access those markets turn to private credit instead due to these advantages.
  2. Increased competition and lower yields: By some estimations, the size of the private credit market was approximately US$1 trillion in 2020 and grew to US$1.5 trillion by the beginning of 20241. With the influx of capital into private credit, competition among private credit lenders has intensified, compounding existing competition between private credit and traditional bank lenders. This competition has led to tighter spreads and lower yields, compelling lenders to innovate and enter new markets where they can still achieve desirable returns. For example, traditional bank lenders have become more active in the middle market where higher yields are available, bringing them into direct competition with private lenders.
  3. Impending maturities: There is a high volume of loans that originated in 2020—when leverage covenants were generally higher than they are today—that will be coming due in 2025. This maturity wall may create opportunities for private lenders willing to offer creative solutions to borrowers that are seeking refinancing, including by allowing and participating in preferred equity issuances and offering payment-in-kind interest.

Potential impact of the upcoming presidential election

The upcoming presidential election adds a layer of uncertainty to the private credit market, with potential impacts in several key areas:

  1. Regulatory environment: Depending on the election’s outcome, we may see changes in the regulatory landscape. A continuation of a Democrat-led administration might mean stricter regulations on private lenders, particularly in terms of transparency and reporting requirements, due to fears that the private credit market has grown large enough to impact other aspects of the financial system. Conversely, a new administration might mean a more relaxed regulatory environment, potentially encouraging further growth in the private credit sector or more activity in higher-risk loans from traditional bank lenders.
  2. Interest rates: The Federal Reserve may be reluctant to make material changes to interest rates prior to November in order to avoid being seen as influencing the election, so interest rates may stay at the current high levels at least through the election. Borrowers may hold off on seeking financing until after the election (if they have that option) anticipating that the Federal Reserve will resume cutting interest rates at that point. In particular, borrowers using loans to finance acquisitions or capital growth may wait to see if rates lower to determine how much leverage their acquisition or project can support.
  3. Market sentiment and stability: Elections often bring volatility and uncertainty to financial markets, including the private credit market. Market participants may rush to close pending deals before the election due to concerns about this impact on the market. However, as noted above, certain activity may slow until after the election in anticipation of interest rate reductions.

Conclusion

The private credit market has continued to exhibit significant growth; however, this growth may be impacted by the increased competition from new private credit lenders entering the market and from traditional lenders trying hard to maintain their existing relationships with borrowers. The upcoming presidential election adds an additional layer of complexity, with potential changes to regulatory frameworks and impacts on interest rates and market sentiment all likely to influence the market. As always, market participants should stay informed and be prepared to adapt to the evolving landscape.


  1. See “Understanding Private Credit”, Morgan Stanley Investment Management. June 20, 2024.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

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