Evolution and Impact of the Private Credit Market

The private credit market has undergone a profound transformation, shifting from a specialised niche within the realm of alternative investments to a pivotal and dynamic force in the landscape of global finance. Once primarily focused on traditional direct lending, the market now encompasses an extensive and varied ecosystem characterised by a wide range of strategies, asset classes and innovative capital solutions. Kothari Partners has played an active role during 2025 in this area for a Mid Cap client¹.

At the beginning of 2025, assets under management in the private credit sector were estimated to be around $3 trillion, with projections suggesting this figure could increase to $5 trillion by 2029. This remarkable growth is reshaping the way companies access funding, providing alternative routes beyond traditional banking channels and offering investors new opportunities to pursue returns within a rapidly evolving market environment.

A Market Defined by Structural Tailwinds

Several long-term forces continue to underpin the expansion of the private credit market, significantly shaping its current trajectory.

Following the regulatory reforms implemented in the wake of the 2008 financial crisis, banks have faced far stricter capital requirements. These heightened constraints have limited traditional banks’ ability to participate in lending, particularly within the middle-market and to non-investment-grade borrowers. As a result, private credit funds have stepped in to address this gap, offering financing solutions that are not only swifter and more dependable but also tailored to the specific needs of borrowers capabilities that banks are frequently unable to match.

With public markets experiencing ongoing volatility and fixed income returns remaining compressed, private credit has emerged as an increasingly attractive asset class for investors. Notably, it provides floating-rate structures that adjust in line with benchmark rates, ensuring greater adaptability to shifting market conditions. In addition, private credit offers compelling risk-adjusted yields, exhibits low correlation to traditional public markets and enables investors to customise their exposure across different geographies and sectors.

This combination of flexibility, yield and diversification has fuelled robust institutional interest in private credit, drawing in a wide spectrum of investors from pension funds to sovereign wealth funds.

The private credit market has evolved far beyond its origins in senior secured loans. Today, a variety of new strategies have emerged, including asset-based finance, infrastructure and real-estate credit, hybrid capital structures, special situations and opportunistic credit, as well as mezzanine and junior capital. This expansion in strategy has not only increased the resilience of the market but has also broadened its appeal to a wider range of investors and borrowers.

Key Themes Shaping the Market

Despite the challenges of tighter spreads and intensifying competition, the private credit market continues to experience robust growth. Investors are increasingly diversifying both across different strategies and geographical regions. Europe, in particular, is emerging as an area of strong interest due to its appealing risk-adjusted returns.

The combination of elevated underlying risks and narrowing spreads is making the accurate pricing of risk considerably more complex. A notable trend is the rising use of payment-in-kind (PIK) features by borrowers. While these instruments can offer greater flexibility, they also raise concerns about the potential for mispricing and increased vulnerability under future stress scenarios.

Scale has become a significant competitive advantage in the private credit market. Larger managers are better positioned to offer comprehensive capital solutions, leverage proprietary data, deliver tailored financing structures and support borrowers through complex transactions. This dynamic is driving industry consolidation and paving the way for the rise of multi-strategy private credit platforms.

Although still in its infancy, the private credit secondary market is gradually maturing. There is a noticeable increase in GP-led transactions, the use of continuation vehicles and the provision of liquidity solutions for limited partners. These developments are allowing funds to achieve greater flexibility in managing long-term assets.

Prevailing economic uncertainty and mounting refinancing pressures are creating new opportunities within special situations and opportunistic credit. These transactions often involve activities such as recapitalisations, refinancing, liability management and scenarios adjacent to distress. Managers who possess expertise in restructuring are particularly well positioned to capitalise on these developments.

Types of Private Credit Strategies

The private credit sector can be broadly categorised into five main types:

Strategy	Description
Direct Lending	Senior secured loans to private, non-investment-grade companies; typically floating-rate.
Mezzanine Debt	Subordinated debt with higher yields and potential equity kickers.
Second Lien Debt	Junior to first-lien loans but senior to mezzanine; higher risk and return.
Preferred Equity	Hybrid instruments offering equity-like upside with contractual payments.
Opportunistic / Special Situations	Flexible capital for complex or distressed scenarios.

This variety allows investors to structure portfolios according to specific risk and return objectives.

Implications for Corporate Borrowers¹

Private credit can be particularly valuable for companies that are considered too large or carry higher risk profiles for banks, as well as those that are too small or not ideally suited for public markets. In addition, firms requiring tailored or rapid financing arrangements benefit from this market. Through private credit, businesses can secure funding solutions that are closely aligned with their immediate needs, often within shorter timeframes compared to traditional sources.

Private credit lenders often serve borrowers with higher risk profiles and operate outside of the conventional banking regulatory environment. As a result, the cost of capital for these borrowers is typically higher. Borrowers should anticipate elevated interest rates, additional fees and tighter controls on cash flow. Common examples include higher interest rates, supplementary fees and stricter cash flow management. Furthermore, private credit agreements frequently feature stringent covenant requirements, such as maintenance covenants, detailed financial reporting, cash sweep mechanisms and occasionally, board observer rights. However, since these transactions are typically negotiated directly or with a small group of lenders, there is generally greater scope for negotiation compared to larger, syndicated loan markets.

The transactions are not dependent on syndication or the sale of loans to a broad investor base. This structure removes the risk of market flex or syndication failure, providing borrowers with enhanced certainty regarding execution and greater funding stability.

It is, however, less transparent than traditional lending channels or public markets, as highlighted by the IMF. This opacity is apparent in the use of stale valuations, limited regulatory oversight and less clear relationships between lenders and providers of leverage.

The IMF noted that the private credit sector has not yet faced a severe downturn at its current scale. In such adverse environments, lenders may enforce covenants more stringently, refinancing may become more challenging and valuation markdowns could lead to lender driven restructurings.

Outlook: A Market Entering Its Next Phase²

As the private credit market transitions into a new phase, characterised by greater scale, increased sophistication and heightened strategic significance. Borrowers today are seeking more flexible, relationship-driven sources of capital, which has prompted private credit managers to expand both their range of capabilities and their global footprint.

Several important developments are shaping the market’s evolution. Firstly, the sector is experiencing ongoing institutionalisation and consolidation, as larger players strengthen their positions and smaller firms seek strategic alliances or mergers. There is also notable growth in asset-based and infrastructure credit, reflecting a diversification of lending opportunities. In addition, the secondary market for private credit is expanding, offering greater liquidity and avenues for portfolio management.

As the market matures, it is attracting increased regulatory scrutiny, with authorities taking a closer interest in the sector’s risk profile and operational practices. Another significant trend is the enhanced use of data and analytics in the underwriting process, enabling more rigorous risk assessment and decision-making.

Supported by strong structural tailwinds and a rising level of global investor interest, private credit is well positioned to remain one of the fastest-growing segments within private markets over the next decade.

Hedging Strategies¹

Within the private credit market, a variety of hedging strategies can be implemented to manage risk and safeguard returns.

One common approach is the use of interest rate swaps or caps, which help borrowers and lenders mitigate the impact of fluctuating interest rates on floating-rate loans. Currency hedging through forwards or options may also be employed when transactions involve cross-border investments, protecting parties from adverse movements in exchange rates.

Additionally, portfolio diversification spreading exposures across industries, geographies and borrower types serves as a fundamental risk management tool. Credit default swaps (CDS) can be used in some cases to offset potential losses from borrower defaults, though their applicability may be limited by the bespoke nature of private credit agreements. Finally, covenant structuring and the inclusion of collateral or security packages provide further downside protection, ensuring that lenders have mechanisms in place to react promptly to deteriorating credit conditions.

These strategies, when combined, can help market participants navigate the uncertainties inherent in private credit, particularly given the sector's relative opacity and evolving regulatory landscape.

Dee Singh Kothari is a senior partner in Kothari Partners

¹ Ideas expressed in this article are solely of the authors. The author nor Kothari Partner’s accept any liability for the incorrect application of these ideas either used by companies, employees or other individuals alike. Contact us on how we can help with the now. 

² At Kothari Partners, our approach is to help our clients understand their current situation, identify the value and decide on the scope, vision and set of strategies for what they could achieve for their business. We help plan their implementation and support them and deliver the solution/ change needed, so it is properly and permanently embedded in their organisation.

We aim to help past and future clients by delivering high-quality work to their organisation, generate real efficiencies and free up time to support better business decisions.

For a confidential discussion please free to contact us, via our corporate website: https://www.KothariPartners.com