Banking without banks: The private credit revolution

Oxford University student Yoshinori Maejima’s explainer on this increasingly popular form of lending

Private credit (also referred to as direct lending) has grown tremendously in the past year, with the largest asset management firms in the world, such as BlackRock, acquiring leading private credit firms such as HPS in July 2025. Preqin, a London-based investment data company, expects the global private credit market to reach $2.6 trillion by 2029.

The rise in private credit is also reflected in the rise of private credit Collateralised Loan Obligations (CLOs), especially in the European market, which has traditionally lagged behind the US private credit CLO market. This was demonstrated in the first private credit CLO offering in Europe by Barings, a global investment management firm, in late 2024. This article will explain what private credit and private credit CLOs are, how they compare to more traditional forms of lending, the reasons for their rise, and potential risks.

What is private credit, and how does it compare to traditional forms of lending?

Private credit refers to loans given by asset managers, rather than banks, to corporate borrowers. The loans originate from private credit funds, which are funded by investors — limited partners (LPs) — and usually include institutional investors such as pension funds. The private credit managers pool these resources and extend loans to corporate borrowers, making a profit from the scheduled interest repayments on the loans. Some of this profit is then returned to the LPs, allowing institutional investors to make a profit.

This structure is quite similar to private equity; however, rather than investing in privately listed companies, investors in private credit invest in loans extended to corporate borrowers. Private credit originated as a way for corporate borrowers to access loans during times of high interest rates, or when banks and debt capital markets were unwilling to extend loans to these corporations because of financial distress or mismanagement. However, in the past decade, they have become a mainstay on the global financial market.

Private credit is often analysed in comparison with syndicated loans, which are loans given by two or more lenders and structured and administered by commercial or investment banks. In comparison to loans extended by a single private credit fund, syndicated loans generally have less restrictive covenants (conditions on loans) and lower interest rates. However, broadly, syndicated loans have a slower speed of execution and are less flexible in their arrangement, considering how the interests of multiple banks must be taken into account.

Private credit also differs from public debt in significant ways. Public debt is traded publicly in debt capital markets, and often has higher liquidity and more transparent pricing, which are determined by market forces while being more heavily regulated by the FCA. On the other hand, private credit is negotiated entirely between the borrower and the lender. They tend to be less liquid than public debt, less regulated, and therefore are considered less transparent.

Notable lenders in the private credit market include firms such as Ares, Blackstone, and Apollo.

What are private credit CLOs, how do they compare to more traditional forms of CLOs, and how are they related to private credit?

Collateralised Loan Obligations (CLOs) are a structured credit product. They are a single security sold to investors backed by a pool of corporate loans, which are usually below investment grade. Investors invest in CLOs to receive interest payments from the underlying pool of corporate loans. To facilitate this, CLO managers classify and divide the underlying pool of loans based on their default risk (referred to as tranches, ranging from AAA to BB) and sell them to investors based on this categorisation.

CLOs fundamentally differ from syndicated CLOs as the source of the loans is different. Syndicated CLOs are backed by corporate loans that are bought from the syndicated loans market. On the other hand, private credit CLOs are backed by loans from the asset management firm’s own private credit portfolio. In short, the asset management firms package the private credit loans extended to corporate borrowers into private credit CLOs and sell them to third-party investors, allowing the asset management firms to free up capital and earn management fees on the CLOs. Thus, as global corporate services provider Ocorian notes, the rise in private credit and private credit CLOs is inextricably linked.

Why is private credit on the rise, and what are its benefits?

Both private credit and private credit CLOs are on the rise as they suit both investors (LPs) and corporate borrowers. The International Monetary Fund (IMF) notes that for LPs, the relative illiquidity of private credit compared to syndicated loans means that they can earn illiquidity premiums, increasing their yield. Additionally, most private credit loans use a floating interest rate and are never traded publicly, thus protecting LPs from volatile changes in interest rates and the wider economy. Lastly, private credit is considered a safer investment compared to private equity, although it may generate lower returns than some private equity investments. As Pete Drewienkiewicz, chief investment officer at Redington, an investment consultancy, notes, in the case of bankruptcy or liquidation, debt always takes precedence over equity and other classes of assets in subsequent legal proceedings, ensuring that investors will be protected when the asset manager’s investments fail.

Barings notes that investors favour private credit CLOs for similar reasons. Compared to syndicated CLOs, they provide greater illiquidity premiums. Additionally, compared to syndicated CLOs, investors have a higher chance of recovering their investments in cases of bankruptcy. Private credit CLOs have stricter covenants compared to syndicated CLOs, and therefore, investors have greater control over their loans and can engage directly with the company management to protect their investments. Ocorian notes that private credit CLOs are less affected by market turbulences, have stronger underwriting discipline, and therefore have lower default rates compared to syndicated CLOs.

Investment management firm State Street cites three key reasons why borrowers turn to private credit. Firstly, private credit offers an attractive alternative to traditional lending, especially as banks are becoming less willing to extend loans given new regulations such as Basel III, which were introduced after the 2008 financial crisis. Additionally, private credit is more flexible than traditional lending, and therefore, borrowers can get loans which are more tailored to their specific needs. Lastly, compared to a private equity investment (if the company is private) or selling equity on the stock market (if the company is public), private credit allows corporate borrowers to obtain funds without diluting their ownership and decision-making processes.

What are the potential risks in private credit?

Despite its benefits, private credit carries significant risks, as noted by Credit Benchmark, a financial data analytics company. The characteristics which make it attractive to investors (illiquidity and lack of regulation) can also be a source of concern. Its illiquidity means that investors cannot readily sell these investments, unlike stocks and debts traded on public markets. Additionally, its lack of regulation means a lack of transparency for investors.

Although there are strict regulations on disclosing information for publicly listed equities and debt, the fact that the borrowers of private credit are often non-listed companies means that information on these companies is less readily available, thus requiring more stringent due diligence from investors. Similarly, as Barings notes, grade reporting in private credit CLOs is less transparent compared to syndicated CLOs.

Finally, private credit’s relatively unregulated nature has attracted the attention of regulators and international bodies. Bodies such as the IMF and the Bank for International Settlements have expressed concern that if underwriting standards for private debt (requirements a borrower must meet to obtain debt) are lowered in the future, and if retail banks gain greater exposure in private credit, this could lead to another financial crisis caused by unsustainable debt.

Although future EU and US regulations on private equity could provide more clarity for industry players and thus help boost the industry, more stringent regulations could also stymy its growth. Cato Holmsen, CEO of Nordic Trustee, a bond trustee and loan agency provider company, argues that while some industry leaders believe that new regulations could improve investor confidence, new regulations should not be too stringent to the extent that they harm demand in the private credit market.

Conclusion

In conclusion, private credit offers an attractive alternative to traditional lending for both institutional investors and corporate borrowers. For investors, it provides a relatively stable, high-yield source of income that is safer than private equity. For borrowers, it provides access to funds which traditional banks may not be willing to lend in a quicker and more flexible manner. However, its low liquidity, relatively less transparent nature, and new regulatory frameworks proposed by bodies such as the IMF can pose significant threats to the growth of the private credit market in the coming years.

Yoshinori Maejima is an undergraduate student reading history and politics at the University of Oxford.

The Legal Cheek Journal is sponsored by LPC Law.