The case for private credit

Market Scale and Growth

• Private credit assets under management (AUM) are estimated at $2.1 trillion, a conservative figure that places the asset class on par with high-yield bonds and broadly syndicated loan markets.
• The sector has expanded from less than $100 billion in AUM in 2010 to its current size over the last 15 years.
• Growth is driven by borrowers' demand for certainty, flexibility, confidentiality, and speed in capital deployment, particularly among private equity-owned companies and sub-investment grade firms.

Strategic Shifts and Investor Behavior

• There is a noted pivot from public fixed income to private credit, specifically by insurance companies seeking investment grade private placements.
• Institutional investors (pension funds, sovereign wealth funds, insurance companies) view private credit as a defensive asset that offers regular cash distributions and acts as a hedge against inflation due to floating-rate exposure.
• Open-ended "evergreen" vehicles, including Business Development Companies (BDCs), are expanding access to mass-affluence and wealth management investors, creating new capital channels during volatile periods.

Market Resilience and Recession Dynamics

• Private credit markets remain insulated from short-term sentiment volatility; hard economic data (e.g., robust payroll reports) suggests the real economy has not yet deteriorated despite weak survey data.
• Historical testing is limited, as the 2008–2009 recession occurred when the asset class was negligible, and the 2020 pandemic shock was followed by immediate, massive fiscal and monetary intervention.
• While losses and defaults are expected to rise in a cyclical downturn, private credit offers structural advantages over public markets regarding creditor coordination, bankruptcy costs, and deal restructuring flexibility.
• A full-blown recession is anticipated to cause increased dispersion in performance across managers, as private credit lacks the rigid benchmarking constraints of public high-yield indices.

Sector Opportunities and Trends

• Senior direct lending remains the core opportunity, with specific focus on US markets and Europe, driven by the need for capital certainty in M&A deals where traditional bank underwriting has retreated.
• Junior debt and flexible capital solutions are increasingly sought by borrowers facing delays in IPOs or exit strategies, requiring extended value-creation timelines.
• Opportunities are emerging in energy transition and investment grade sectors as clients replicate public fixed income portfolios within the private credit space.
• Distressed situations involving debt-to-equity swaps are becoming visible, particularly in European cyclical sectors involving buyout vintages from 2016–2019.

Systemic Risk and Financial Stability

• Goldman Sachs experts argue that systemic risk concerns regarding private credit are overstated, contrasting the asset class with the pre-2008 banking system.
• Private credit managers do not suffer from asset-liability mismatches, as capital is typically deployed for durations matching investor commitments.
• Leverage within vehicles like BDCs is capped by regulation (typically around 2x, often under 1.5x), mitigating the amplifying channels of financial fragility seen in 2008.
• The disintermediation of credit from traditional banks to private credit has acted as a stabilizing force, preventing the credit crunch that might have followed the March 2023 regional banking crisis.