Banks used to own corporate lending. They don't anymore. In our last edition of the semester, we dig into the rise of private credit. This is a market that has grown faster than almost anyone predicted, and is now too large to ignore. We cover the mechanics, the players, the risks, and the opportunity. We will aim to answer what it all means for investors navigating an increasingly bank-free world.

When people hear about “alternative investments,” their minds jump to private equity: Leveraged buyouts, venture capital, and the world of deals made popular by firms like KKR, Blackstone, and Sequoia. But there is another lesser-known corner of the alternative investments universe that, despite growing into a $2.3 trillion asset class, is far less understood than it deserves to be: private credit.

So, what exactly is Private Credit?

On a high level, private credit is simply lending that happens outside of banks or public markets. When a company needs to borrow money, it has a few options. They can walk into a bank, issue bonds that trade publicly, or they can go directly to a private fund and negotiate a loan one-on-one. The last option, a loan from a private fund, is private credit.

Think of it this way. Banks are like your everyday retail store. They carry high volume, standardized products, available to almost anyone. Private credit funds are more like a bespoke tailor. They work with a specific type of client, craft terms to fit that client’s exact situation, and charge a premium for the customization. The borrowers are typically mid-market companies that are too large for a community bank, but too small or too private to access public bond markets.

So why does this exist?

The short answer is 2008. In the aftermath of the financial crisis, regulators cracked down on traditional banks with rules like Basel III, and Dodd-Frank, forcing them to hold more capital and pull back from riskier lending. This left a massive financing gap, especially for middle market businesses, and private credit funds rushed in to fill this gap. What started as a niche solution became a structural necessity for modern finance.

Here’s where the risk-return profile gets interesting. Unlike private equity investors who own a piece of a company and profit when it grows, private credit investors are lenders. They don’t care if the company doubles in value or grows tenfold. They care about one thing: getting their interest payments on time and their principal payments back at the end of the loan. It’s the difference between owning a house and being the mortgage lender. The upside is capped, but so is the downside (at least in theory), and you sit near the top of the capital structure, meaning you get paid back before equity holders if anything goes wrong.

A few features make private credit particularly attractive to institutional investors. Most loans carry floating interest rates, meaning returns rose with the Fed’s rate hikes in 2022 and 2023. Lenders can also negotiate covenants, which are essentially loan protections through contracts. Public bondholders rarely get covenants, giving private credit investors real oversight into the businesses they lend to.

The tradeoff that private credit investors face is illiquidity. These loans, unlike bonds, don’t trade on any sort of exchange. Once the capital is committed it is locked up for years. Investors are compensated for this through an “illiquidity premium.” These are basically additional returns that have historically outpaced comparable public fixed income. Private credit is no longer a niche product. It sits at the intersection of banking, private equity, and fixed income, and understanding it is quickly becoming essential for anyone serious about the current state of the finance world.

Sources: Brookfield

The roots of private credit stretch back decades, but the story really has two chapters: the quiet buildup, and the explosion after 2008.

Long before the financial crisis, private lending existed in pockets. Insurance companies, specialty lenders, and mezzanine debt providers were all doing versions of it. But it was a small, fragmented world. Banks were the undisputed kings of corporate lending, and nobody expected that to change anytime soon.

Then 2008 happened. The Global Financial Crisis wiped out balance sheets, and it permanently rewired how regulators thought about banks. Basel III forced them to hold more capital against risky loans. The Dodd-Frank Act piled on layers of compliance that made lending to smaller, less-rated companies far less attractive. Almost overnight, banks started pulling back from middle market lending, and a massive financing gap opened in their wake.

Private credit funds saw the opening and moved fast. Throughout the 2010s, firms like Ares Management, Golub Capital, and Apollo aggressively scaled their direct lending operations. What had been a niche corner of finance started pulling in serious institutional capital. Pension funds, sovereign wealth funds, and endowments, were hunting for yield in a low-interest-rate world, and private credit kept delivering.

The next big moment came in 2022 and 2023 when the Fed started hiking rates to fight inflation. Because most private credit loans carry floating rates, returns climbed right alongside them. A new wave of capital came flooding in. By 2024, the asset class had crossed $2.3 trillion globally and showed no signs of slowing down. What started as a workaround for a broken banking system had quietly become a structural pillar in the world of finance.

Sources: Morgan Stanley, Winston, FGA Partners

In this edition, we have turned our focus to a hot market right now, private credit. Private credit has grown from a niche lending market into a major cornerstone of alternative investments, now over $2 trillion in size. Its rise accelerated after the 2008 financial crisis, when banking regulations reduced traditional bank lending and created a financing gap that private credit funds quickly filled for companies that needed capital. Today, firms like Apollo, Blackstone, Blue Owl, and Ares dominate the space with flexible, covenant-heavy loans primarily to middle-market companies that are somewhere between traditional bank borrowers and public bond markets.

The asset class appeals to institutional investors since private credit offers floating-rate income, senior positioning in a company’s capital structure, and historically attractive risk-adjusted returns. Rapid growth has also increased competition for deals. However, it has also raised concerns about tighter underwriting standards, and high levels of potential credit stress in a downturn. Despite these risks, there is still a high demand for the long-term expansion of private credit as a core part of alternative investment portfolios.

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Sources: Morgan Stanley, WSJ