A Discussion on Private Credit

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Private credit’s growth and volatile equity markets incentivise companies to stay private.

Private companies enjoy several benefits compared to public companies. They retain greater control and flexibility in their operations as their ownership is more concentrated, which requires fewer approvals for strategic decisions. In addition, private companies do not face public market scrutiny, so management can focus on achieving long-term objectives rather than meeting investor expectations at earnings reports. Moreover, few disclosure requirements apply to private companies, which protects their trade secrets, margins, and strategy from competitors.

Despite these advantages, the most pressing trade-off is reduced access to capital and liquidity, which usually entails a higher cost of capital as well. When companies reach a certain size, it becomes increasingly complex to secure funding in private markets due to a smaller pool of assets, their illiquidity, and the lack of scale. However, the recent growth of the private credit asset class has doubled in the last decade, mitigating this trade-off and providing companies with the opportunity to extend their private life cycle.

Moreover, particularly volatile equity markets make it less attractive for companies to go public. Stripe, a Silicon Valley fintech, decided not to IPO emphasising a long-term product focus and a favourable valuation of $65bn in their last funding round. They are primarily funded by private credit funds from Sequoia Capital, Andreessen Horowitz, and Fidelity. The case of Stripe reflects a major current trend in Tech and similarly applies to the financing of data centres, which require flexible terms due to their uncertain cash flow timeline.

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Private Credit does not necessarily directly compete with banks.

Private credit competes with banks in corporate and leveraged financing as they can offer more flexible and tailored debt solutions. Traditional lenders are subject to a stricter regulatory framework than private credit as they pool funds from depositors rather than investors. However, it has a clear edge over private credit in terms of scale, pricing, and access to capital markets. The following two brief case studies highlight how private credit and traditional banks complement each other.

PetSmart – a pet retail company – needed to refinance billions in debt after their leveraged buyout by PE PC Partners accumulated a higher-than-expected debt burden due to disruptions to their cash flow. They were downgraded to a junk status, and the leveraged loan and bond market was closed off to them as banks regarded the deal as too risky. Apollo, KKR, and HPS structured a confidential, fast, and low-visibility $4.65bn private credit deal with flexible terms, which provided PetSmart with the liquidity to stabilise their cash flow.

During Covid-19, Boeing experienced massive cash flow pressure as airlines were unable to deliver on their payments. Boeing is a mature public company with a solid balance sheet and JP Morgan, Citi, BofA, and Wells Fargo set up revolving credit facilities for tens of billions of dollars. Private Credit could not have deployed capital at this scale in the same amount of time and does not focus on a short-term liquidity solution. Additionally, institutional lenders supporting Boeing reassured investors and restored market confidence.

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Does Private Credit pose a systematic risk?

The talk around the systematic risk posed by private credit to financial markets has grown over the past year and has been recently amplified by the bankruptcy filing of First Brands. The concerns lie around the lack of transparency and the loose regulation framework of private markets. Particularly, concern is centred around the systematic risk posed to financial institutions as the spread between institutional lenders and private credit increases.  

Goldman Sachs Research argued against systematic risk in a report published in the Financial Times. They claim leverage is actually limited and that loans exiting the banking industry decrease systemic risk. Losses in private credit would fall solely on long-only investors of private credit funds, and as they are largely unleveraged, they barely affect financial institutions. Private credit funds borrow from institutions to boost returns, but in the form of credit lines which are in place to offset a potential liquidity crisis and remain widely undrawn.

Investor runs from private credit funds are highly unlikely as money investors are usually locked up for extended periods or in the least, have hard caps on redemptions. Additionally, private credit funds do not face asset-liability mismatches like banks and are still able to access, although limitedly, secondary markets for private credit loans.

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Conclusion

Private credit is evolving into a mature asset class that complements institutional lending in specific scenarios. Its capital inflows support companies wishing to remain private for longer. However, its limited scale and transparency mean it does not yet rival traditional banks and must continue to enhance liquidity and openness, particularly in secondary markets, to further increase its role in corporate finance.

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HSBC (2025) Private credit: From alternative to strategic asset class. Available at: https://www.business.hsbc.com/en-gb/insights/financing/private-credit-from-alternative-to-strategic-asset-class

Dunkley, E. (2025) 'Wealth fund warns of private credit risks', Financial Times, 28 July. Available at: https://www.ft.com/content/cba83fe4-9606-42ce-9a08-4e3e8a314a5b

Wigglesworth, R. (2025) 'Four reasons why private credit isn’t actually a systemic risk', Financial Times, 1 August. Available at: https://www.ft.com/content/75d85d5f-6aa0-4f16-ac52-1768b89799ff