Private Credit: Trends and Policy Issues
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April 23, 2024
Private Credit: Trends and Policy Issues
Private credit generally refers to a type of lending
with a traditional structure, giving the loans to businesses
undertaken by nonbank financial institutions and made to
and holding the loans themselves, typically to maturity.
small- and medium-sized private companies that are not
Other types or subcategories of private credit include
publicly traded. As a rapidly growing market that competes
distressed debt (lending to companies in bankruptcy or
with traditional bank loans, but with a different regulatory
near-bankruptcy), special situations debt (lending in
apparatus, it has drawn financial stability concerns from
unusual events such as mergers, acquisitions, and changes
some observers. This In Focus explains private credit
of control), bridge financing (short-term lending intended
operations, trends, and policy issues.
to sustain a firm while it seeks permanent funding), venture
debt (lending to early-stage companies that normally
What Is Private Credit?
receive venture capital backing), and mezzanine debt (debt
Private credit, also known as private debt, emerged in the
that is subordinate to other debt but senior to equity in
1980s when insurance companies started lending money
bankruptcy repayment orders).
directly to businesses. Unlike private equity, which
involves ownership stake in businesses, private credit is a
Figure 2. Corporate Debt Market Instruments
form of business debt. Major private credit investors
include pension funds, foundations, endowments, asset
managers (including financial firms that also engage in
private equity activities), and insurance companies. Because
some nonbanks often use asset managers to allocate their
money rather than lending directly, industry activities are
concentrated among multiple large private credit managers
(Figure 1).
Figure 1. Top 20 Private Credit Managers
Source: J. P. Morgan.
Businesses can borrow money from various lenders and
markets. Figure 2 compares the typical loan size and
riskiness of direct loans to other debt instruments. Private
credit often involves small and middle-market borrowers
that are not large enough to issue bonds. It overlaps with the
market for leveraged loans, which are higher-risk loans to
businesses with high indebtedness or low credit ratings.
Private credit could compete with traditional bank loans but
is usually riskier than bank loans.
Market Trends
Some industry sources estimate the size of the global
private credit market to be roughly $1.5 trillion to $2.1
trillion in assets under management (AUM). This is
comparable to the size of the $1.7 trillion leveraged loan
Source: Federal Reserve.
market and a fraction of the more than $50 trillion U.S.
Notes: Cal ed capital refers to invested capital. Dry powder refers to
fixed-income market (which largely consists of securities
committed but not yet deployed capital.
investments paying investors fixed interest payments).
Private credit is one of many alternative investments—a
broad category of investments that stand in contrast to
One large asset manager projects the private credit market’s
traditional investments such as holding publicly traded
global AUM to reach $3.5 trillion by 2028 (Figure 3).
stocks and bonds. Private credit is available in the private
Around three quarters of the global private credit market
market alongside private equity, hedge funds, private real
focuses its investments in the United States. Like private
estate, and venture capital. The Securities and Exchange
capital markets more generally, the private credit industry
Commission (SEC) has certain authorities that are relevant
has recently experienced significant growth. Because
to private securities markets, which are less regulated than
private credit providers could borrow from or partner with
public markets are. The most common type of private credit
banks, the industry is also somewhat intertwined with
is direct lending, where nonbank investors provide loans
banking.
https://crsreports.congress.gov
Private Credit: Trends and Policy Issues
Figure 3. Private Credit Global Assets under
investors. The illiquid nature of private credit investments
Management (AUM): Actual and Forecasted
makes them less prone to run-like behaviors commonly
seen at banks. Some academic research also finds that
private credit funds are more efficient than banks in
facilitating credit supply during stress. Additional research
indicates that private credit lenders exhibit lower leverage,
which is a common risk measure of a financial entity’s
capability to multiply risks and returns and transmit
financial risks elsewhere. Over private credit’s relatively
short history, it has generated a lower loss ratio than other
comparable debt instruments.
Source: BlackRock.
Commentators have also identified policy concerns raised
Private Credit in the Expanding Private Markets
by the growth of private credit.
Investment in private credit, like investment in private
Market transparency and data availability. Because
equity, is generally accessible only to institutional and
private credit transactions normally take place in private
individual investors who are deemed to have the means to
markets through bilateral negotiations, it has been difficult
understand and sustain financial risks (i.e., qualified
to obtain reliable data for market-wide risk assessments and
institutions and accredited investors). The market involves
systemic risk monitoring.
limited public transparency, because less disclosure is
required than in public markets. Private funds and securities
Activity-transition from banks to nonbanks. Some
offerings have become increasingly mainstream. For
commentators have attributed the high growth in private
example, private securities offerings have outpaced public
credit to the tightening of bank lending standards and the
securities offerings in recent years and reached a ratio of
transferring of bank-like activities and risks from banks’
approximately 4:1 between July 1, 2021, and June 30, 2022.
portfolios to private credit funds and other nonbanks.
Investors have entered the market in search of investment
Unlike banks, nonbanks typically do not receive taxpayer
returns and diversification, leading to increased market size
guarantees or backstop, and investors generally assume all
and importance. For example, CalPERS, the largest U.S.
the risk of loss. The “de-banking” trend has prompted
public pension plan with around $500 billion in assets
discussion about different regulation methods at banks and
under management, announced in March 2024 that it plans
nonbanks and how that could trigger financial instability.
to increase its total private market allocation from 33% of
Contagion effects. Given the increased size of private
plan assets to 40% and its private credit allocation from 5%
credit and its interconnectedness with banks and other
to 8%. According to CalPERS’s performance review,
nonbanks, its own risks could spill over to others through
private credit was its best-performing private asset segment,
channels such as credit losses, capital calls, and leverage.
with a 13.3% annual return. Meanwhile, some public fund
Even private credit funds with modest direct leverage may
managers (e.g., Franklin Templeton) have pivoted toward
still experience multiple layers of leverage at borrowers,
alternative investments by acquiring private credit
investors, and special-purpose structures.
managers. Other existing private credit managers (e.g.,
Oaktree Capital Management) have increased the size of
Valuation issues. Asset valuation for illiquid private fund
their private credit funds.
assets tends not to keep pace with the deterioration of
valuation losses during downturns. This could lead to
Interconnectedness Between Nonbanks and Banks
sudden markdowns that may amplify the tightening of
Although private credit is a form of nonbank lending, asset
credit conditions, especially in stress scenarios.
managers and other private credit lenders often themselves
Pending cycle-tests. Private credit’s more substantial
borrow from banks, creating interconnectedness between
growth happened after the 2007-2009 global financial
the industries. According to data from the Federal Reserve,
crisis. The industry’s ability to withstand prolonged
bank loans and leases to non-depository financial
recession remains uncertain.
institutions (which could include private credit
intermediaries) have doubled from $500 billion in January
Regulatory Actions
2019 to $1 trillion in January 2024 and increased more than
In 2023, the SEC finalized private fund adviser rules and
10% between January 2023 and January 2024. Other
amended Form PF for private fund reporting. These final
categories of bank loans (e.g., commercial and industrial
rules aim to enhance the regulation of certain private credit
loans, real estate loans, and consumer loans) saw minor
fund advisers and provide more visibility into the private
increases or declines. In addition, banks’ involvement with
fund markets for investor protection and financial stability
private credit could include partnering with private credit
monitoring purposes. The Financial Stability Oversight
funds in broadly syndicated loans or offloading higher-risk
Council finalized guidance on nonbank systemically
assets to private credit funds through synthetic risk
important financial institutions designations in 2023 that
transfers.
outlines procedures for deciding whether a nonbank would
be subject to increased supervision and regulation.
Policy Issues
Private credit provides a source of financing to borrowers
Eva Su, Specialist in Financial Economics
including higher risk businesses that are smaller in size.
IF12642
Private credit tends to attract longer-term buy-and-hold
https://crsreports.congress.gov
Private Credit: Trends and Policy Issues
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12642 · VERSION 1 · NEW
April 23, 2024
Private Credit: Trends and Policy Issues
Private credit generally refers to a type of lending
with a traditional structure, giving the loans to businesses
undertaken by nonbank financial institutions and made to
and holding the loans themselves, typically to maturity.
small- and medium-sized private companies that are not
Other types or subcategories of private credit include
publicly traded. As a rapidly growing market that competes
distressed debt (lending to companies in bankruptcy or
with traditional bank loans, but with a different regulatory
near-bankruptcy), special situations debt (lending in
apparatus, it has drawn financial stability concerns from
unusual events such as mergers, acquisitions, and changes
some observers. This In Focus explains private credit
of control), bridge financing (short-term lending intended
operations, trends, and policy issues.
to sustain a firm while it seeks permanent funding), venture
debt (lending to early-stage companies that normally
What Is Private Credit?
receive venture capital backing), and mezzanine debt (debt
Private credit, also known as private debt, emerged in the
that is subordinate to other debt but senior to equity in
1980s when insurance companies started lending money
bankruptcy repayment orders).
directly to businesses. Unlike private equity, which
involves ownership stake in businesses, private credit is a
Figure 2. Corporate Debt Market Instruments
form of business debt. Major private credit investors
include pension funds, foundations, endowments, asset
managers (including financial firms that also engage in
private equity activities), and insurance companies. Because
some nonbanks often use asset managers to allocate their
money rather than lending directly, industry activities are
concentrated among multiple large private credit managers
(Figure 1).
Figure 1. Top 20 Private Credit Managers
Source: J. P. Morgan.
Businesses can borrow money from various lenders and
markets. Figure 2 compares the typical loan size and
riskiness of direct loans to other debt instruments. Private
credit often involves small and middle-market borrowers
that are not large enough to issue bonds. It overlaps with the
market for leveraged loans, which are higher-risk loans to
businesses with high indebtedness or low credit ratings.
Private credit could compete with traditional bank loans but
is usually riskier than bank loans.
Market Trends
Some industry sources estimate the size of the global
private credit market to be roughly $1.5 trillion to $2.1
trillion in assets under management (AUM). This is
comparable to the size of the $1.7 trillion leveraged loan
Source: Federal Reserve.
market and a fraction of the more than $50 trillion U.S.
Notes: Cal ed capital refers to invested capital. Dry powder refers to
fixed-income market (which largely consists of securities
committed but not yet deployed capital.
investments paying investors fixed interest payments).
Private credit is one of many alternative investments—a
broad category of investments that stand in contrast to
One large asset manager projects the private credit market’s
traditional investments such as holding publicly traded
global AUM to reach $3.5 trillion by 2028 (Figure 3).
stocks and bonds. Private credit is available in the private
Around three quarters of the global private credit market
market alongside private equity, hedge funds, private real
focuses its investments in the United States. Like private
estate, and venture capital. The Securities and Exchange
capital markets more generally, the private credit industry
Commission (SEC) has certain authorities that are relevant
has recently experienced significant growth. Because
to private securities markets, which are less regulated than
private credit providers could borrow from or partner with
public markets are. The most common type of private credit
banks, the industry is also somewhat intertwined with
is direct lending, where nonbank investors provide loans
banking.
https://crsreports.congress.gov
Private Credit: Trends and Policy Issues
Figure 3. Private Credit Global Assets under
investors. The illiquid nature of private credit investments
Management (AUM): Actual and Forecasted
makes them less prone to run-like behaviors commonly
seen at banks. Some academic research also finds that
private credit funds are more efficient than banks in
facilitating credit supply during stress. Additional research
indicates that private credit lenders exhibit lower leverage,
which is a common risk measure of a financial entity’s
capability to multiply risks and returns and transmit
financial risks elsewhere. Over private credit’s relatively
short history, it has generated a lower loss ratio than other
comparable debt instruments.
Source: BlackRock.
Commentators have also identified policy concerns raised
Private Credit in the Expanding Private Markets
by the growth of private credit.
Investment in private credit, like investment in private
Market transparency and data availability. Because
equity, is generally accessible only to institutional and
private credit transactions normally take place in private
individual investors who are deemed to have the means to
markets through bilateral negotiations, it has been difficult
understand and sustain financial risks (i.e., qualified
to obtain reliable data for market-wide risk assessments and
institutions and accredited investors). The market involves
systemic risk monitoring.
limited public transparency, because less disclosure is
required than in public markets. Private funds and securities
Activity-transition from banks to nonbanks. Some
offerings have become increasingly mainstream. For
commentators have attributed the high growth in private
example, private securities offerings have outpaced public
credit to the tightening of bank lending standards and the
securities offerings in recent years and reached a ratio of
transferring of bank-like activities and risks from banks’
approximately 4:1 between July 1, 2021, and June 30, 2022.
portfolios to private credit funds and other nonbanks.
Investors have entered the market in search of investment
Unlike banks, nonbanks typically do not receive taxpayer
returns and diversification, leading to increased market size
guarantees or backstop, and investors generally assume all
and importance. For example, CalPERS, the largest U.S.
the risk of loss. The “de-banking” trend has prompted
public pension plan with around $500 billion in assets
discussion about different regulation methods at banks and
under management, announced in March 2024 that it plans
nonbanks and how that could trigger financial instability.
to increase its total private market allocation from 33% of
Contagion effects. Given the increased size of private
plan assets to 40% and its private credit allocation from 5%
credit and its interconnectedness with banks and other
to 8%. According to CalPERS’s performance review,
nonbanks, its own risks could spill over to others through
private credit was its best-performing private asset segment,
channels such as credit losses, capital calls, and leverage.
with a 13.3% annual return. Meanwhile, some public fund
Even private credit funds with modest direct leverage may
managers (e.g., Franklin Templeton) have pivoted toward
still experience multiple layers of leverage at borrowers,
alternative investments by acquiring private credit
investors, and special-purpose structures.
managers. Other existing private credit managers (e.g.,
Oaktree Capital Management) have increased the size of
Valuation issues. Asset valuation for illiquid private fund
their private credit funds.
assets tends not to keep pace with the deterioration of
valuation losses during downturns. This could lead to
Interconnectedness Between Nonbanks and Banks
sudden markdowns that may amplify the tightening of
Although private credit is a form of nonbank lending, asset
credit conditions, especially in stress scenarios.
managers and other private credit lenders often themselves
Pending cycle-tests. Private credit’s more substantial
borrow from banks, creating interconnectedness between
growth happened after the 2007-2009 global financial
the industries. According to data from the Federal Reserve,
crisis. The industry’s ability to withstand prolonged
bank loans and leases to non-depository financial
recession remains uncertain.
institutions (which could include private credit
intermediaries) have doubled from $500 billion in January
Regulatory Actions
2019 to $1 trillion in January 2024 and increased more than
In 2023, the SEC finalized private fund adviser rules and
10% between January 2023 and January 2024. Other
amended Form PF for private fund reporting. These final
categories of bank loans (e.g., commercial and industrial
rules aim to enhance the regulation of certain private credit
loans, real estate loans, and consumer loans) saw minor
fund advisers and provide more visibility into the private
increases or declines. In addition, banks’ involvement with
fund markets for investor protection and financial stability
private credit could include partnering with private credit
monitoring purposes. The Financial Stability Oversight
funds in broadly syndicated loans or offloading higher-risk
Council finalized guidance on nonbank systemically
assets to private credit funds through synthetic risk
important financial institutions designations in 2023 that
transfers.
outlines procedures for deciding whether a nonbank would
be subject to increased supervision and regulation.
Policy Issues
Private credit provides a source of financing to borrowers
Eva Su, Specialist in Financial Economics
including higher risk businesses that are smaller in size.
IF12642
Private credit tends to attract longer-term buy-and-hold
https://crsreports.congress.gov
Private Credit: Trends and Policy Issues
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12642 · VERSION 1 · NEW