The Rise of Private Credit
Written by: Vince Mancuso, Executive Vice President & Sales Director, Heritage Bank of Commerce/Bayview Funding
Is Private Credit Taking Over?
The rise of private credit in the commercial finance space has been one of the most significant developments in the financial industry over the past decade, and it’s been one of the “Hot” topics at our recent industry events. This trend is expected to continue shaping the working capital financing landscape in 2025 and beyond, presenting both challenges and opportunities for factors, asset-based lenders, and banks. What exactly is driving this transformation and what are its implications for the future of our industry?
The Growth of Private Credit
Private credit has experienced explosive growth, with the asset class reaching nearly $2 trillion in assets under management (AUM) in 2023 globally, which was approximately ten times larger than in 2009. This rapid expansion is expected to continue, with global private credit AUM projected to reach $3 trillion by 2028. The scale of this growth is reshaping the entire financial landscape, creating new dynamics in small business financing markets and challenging traditional financial paradigms.
Factors Driving Growth
Several factors have contributed to the rise of private credit:
Bank Retrenchment: Following the 2008 financial crisis and subsequent regulatory changes, traditional banks have scaled back their lending activities, particularly in areas like leveraged lending. This retreat has created a significant gap in the market that private credit providers have eagerly filled.
Private Equity Expansion: The rapid growth of the private equity industry has created increased demand for flexible financing solutions. Private credit funds have positioned themselves as ideal partners for private equity firms, offering tailored financing packages that align with complex deal structures.
Yield-Seeking Investors: In a low-interest-rate environment, investors have been attracted to the higher yields offered by private credit investments. This yield premium has drawn a diverse range of institutional investors, from pension funds to sovereign wealth funds, fueling the sector's growth.
Flexibility and Customization: Private credit lenders can offer more tailored solutions that match borrowers' needs, often with quicker execution and higher leverage levels. This adaptability has made private credit an attractive option for businesses seeking financing outside the rigid structures of traditional banking.
Impact on the Working Capital Financing Landscape
The growth of private credit is reshaping the working capital financing space in several ways:
Market Share Shift: Private credit is increasingly displacing banks in various lending segments, particularly in leveraged buyouts and middle-market lending. In the United States, banks' share of private lending in the economy has fallen from 60% in 1970 to 35% in 2023, highlighting the significant inroads made by alternative lenders.
Diversification of Strategies: While direct lending remains the dominant strategy in private credit, the sector is expanding into new areas such as:
Investment-grade private credit
Specialty finance (e.g., litigation finance, royalties, aircraft leasing)
Real estate private debt
Infrastructure debt
This diversification is allowing private credit to penetrate various niches of the financial market, further solidifying its position.
Blurring Lines: The boundaries between private credit and traditional lending are becoming increasingly indistinct:
Terms and Pricing: The gap between private credit and traditional lender markets has decreased in terms of covenant packages and pricing, creating a more competitive landscape.
Deal Sizes: Private credit lenders have demonstrated the ability to finance larger deals, commonly syndicating deals with other lenders. This capability allows them to compete for transactions that were once the exclusive domain of large banks.
Partnerships: Banks are increasingly forming joint ventures and partnerships with private credit lenders to access higher returns and deeper pools of potential borrowers. These collaborations are reshaping the competitive dynamics of the lending market.
The rise of private credit presents both challenges and opportunities for traditional lenders and banks:
Challenges
Increased Competition: Banks face intensified competition for corporate lending revenue, particularly in areas where private credit offers more attractive terms. This competition may erode market share and profitability for traditional lenders.
Pressure on Margins: The competitive environment may lead to pressure on lending margins for traditional lenders, forcing them to reassess their pricing strategies and risk appetites.
Regulatory Scrutiny: As banks increase their involvement in private credit through partnerships and investments, they may face additional regulatory scrutiny. Navigating this complex regulatory landscape while remaining competitive will be a key challenge.
Opportunities
Strategic Partnerships: Banks are leveraging their existing customer networks by partnering with private credit investors to create direct lending funds or platforms. These partnerships allow banks to offer a broader range of financing solutions to their clients.
Risk Transfer: Banks are increasingly using synthetic risk transfers (SRTs) to offload riskier portions of debt to private credit funds while retaining less risky parts. This strategy allows banks to optimize their balance sheets and manage risk more effectively.
Diversification: By adapting to the growth of private credit, banks can diversify their revenue streams and potentially access higher returns. This diversification can help offset potential losses in traditional lending segments.
As we look towards 2025 and beyond, several trends are shaping the commercial finance landscape:
Continued Growth and Mainstreaming of Private Credit: Private credit is expected to move deeper into the mainstream, with increased adoption across various regions and sectors. The addressable market for private credit could exceed $30 trillion in the United States, indicating significant room for further expansion.
Retail Investor Participation: The focus on retail investor opportunities is intensifying, with managers launching evergreen funds and private credit Exchange Traded Funds (ETFs). This trend is likely to accelerate the growth of the asset class and democratize access to private credit investments.
Insurance Company Involvement: Synergies between insurance companies and alternative managers are growing, leading to new investment structures and risk-sharing arrangements. This collaboration is opening new avenues for capital deployment and risk management.
Regulatory Evolution: The regulatory approach toward private credit markets is evolving, with changes in disclosure requirements and capital formation policies. As the sector grows, regulators are likely to increase their focus on private credit, potentially leading to new compliance challenges and opportunities.
Technological Innovation: Advancements in financial technology are leading to more efficient lending processes and new investment opportunities in the private credit space. AI-driven credit analysis, blockchain-based loan documentation, and advanced data analytics are just a few examples of how technology is transforming the sector.
ESG Considerations: Environmental, Social, and Governance (ESG) factors are beginning to play an increasingly important role in private credit investments, influencing both lender and borrower behavior. ESG-focused private credit funds are emerging, and borrowers are increasingly evaluated on their ESG performance.
The rise of private credit represents a significant shift in the commercial finance landscape. As this trend continues, we can expect to see:
A more diverse and competitive lending environment.
Increased collaboration between traditional lenders and private credit providers.
Greater access to flexible financing solutions.
New investment opportunities for a wider range of investors.
Factors, asset-based lenders and institutional lenders will need to adapt their strategies to remain competitive in this evolving landscape. Those that successfully navigate this transition may find new opportunities for growth and innovation in the commercial finance space. As the private credit market matures and expands, it will be crucial for all stakeholders – lenders, borrowers/clients, investors, and regulators – to carefully monitor and manage the associated risks and opportunities. The future of commercial finance is likely to be characterized by a dynamic interplay between traditional and alternative lending sources, with private credit playing an increasingly central role in shaping the financial ecosystem of tomorrow.
Data in this article was sourced from Moody's Private Credit Outlook, 1/21/25
About Vince Mancuso
Vince Mancuso brings over 30 years of expertise in commercial finance, serving stakeholders and service partners with deep industry knowledge and strategic leadership. Throughout his career, Vince has held key roles in sales, credit, portfolio management, and executive leadership, including serving as a strategic officer for a mid-sized private debt fund and as President and CEO of a leading North American commercial finance company. As Executive Vice President & Sales Director at Bay View Funding, Vince leads the business development team, driving portfolio growth initiatives and national market expansion. A recognized industry expert, he has authored more than 20 specialized training curriculums and holds prestigious designations, including the Certified Account Executive in Factoring (CAEF) from the International Factoring Association and the Secured Finance Certified Professional (SFCP) from the Secured Finance Network.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.