2025 Private Credit Outlook

Private credit has experienced significant growth, expanding from $1 trillion in 2020 to approximately $1.5 trillion at the start of 2024, with projections reaching $2.6 trillion by 2029. This expansion is driven by borrowers valuing the speed and flexibility of private credit amidst tighter bank lending conditions. The resilience of sponsored middle market loan activity has been bolstered by demand for add-on financings. Despite rising financing costs, credit quality has remained stable, and deal flow is expected to increase as private equity deploys its record high dry powder, estimated to reach $1.6 trillion by the end of 2024.

In response to the economic environment, a proactive approach is essential, focusing on analyzing companies' earnings and cash-flow generation while maintaining a diversified portfolio. The emphasis is on non-cyclical industries, such as software and insurance, to manage risk. Higher interest rates have pressured some borrowers, particularly those with older deals.

A trend to monitor is the use of payment-in-kind (PIK) structures, which borrowers may prefer to manage cash interest burdens as rates decline moderately. The appropriateness of PIK depends on business fundamentals and capital structure. Growth opportunities are anticipated in asset-based finance and opportunistic capital, as borrowers seek creative refinancing solutions in the private markets. Additionally, potential lies in unsponsored deals, hybrid capital for growth companies, and real estate lending.