Beneath the surface. Private markets: An essential layer of economic infrastructure.

This is a functional shift in the plumbing of capitalism. Refinancing an acquisition, funding a battery-storage project, financing capital equipment, or funding a pool of consumer receivables? Today, the chances are that the capital provided has ultimately come from a pension fund, insurer, sovereign wealth fund or other institutional investor. Credit is still flowing to the real economy, but the balance sheet behind it is changing.
 

The real economy’s new lender

In many parts of the economy, private credit is now increasingly the preferred or primary source of credit. That matters because credit is not an abstract financial product. It is the mechanism through which companies invest, infrastructure is built, inventories are financed, homes are purchased, goods move through supply chains and new technologies scale. If private lenders are now central to those flows, then private credit has moved from the edge of the financial system and into its operating core.

Historically, the focus for private credit has been on the ‘middle market’ - companies too large, complex or acquisitive for relationship-bank lending, but too small or private to issue bonds efficiently. These businesses are, in our opinion, the ‘real economy’, the backbone of employment, services, manufacturing, healthcare, software and regional economic activity. Before, their financing needs were in the main met by banks, but today are funded by private credit managers willing to underwrite bespoke loans, hold them to maturity and provide follow-on capital.

On a regional basis, this shift towards non-bank lending is accelerating faster in Europe than elsewhere. While in Europe 85% of corporate debt is still provided by banks, in the US, with its more mature direct lending/private credit market, this figure is only 50%. However, this gap is closing: despite the US private debt market growing 10X since 2007, this has been outpaced by Europe, registering growth of 29X over the same period¹. This dynamic suggests the European market may prove more compelling over the longer-term.          

Wherever the economy requires capital that is asset-based, long-duration, operationally complex or poorly suited to bank balance sheets, private credit has stepped in. It now finances aircraft, rail assets, warehouses, data centres, renewable-energy, social infrastructure, residential mortgages, consumer loans, equipment leases and trade receivables. These are not peripheral financial assets. They are the working assets of the real economy.

For investors, its importance is not only that it offers investors a new return stream, but that it increasingly determines the availability, price and structure of credit for borrowers outside public markets. Private credit has become a transmission mechanism between long-term savings and productive investment. Institutional capital is being transformed into loans secured against companies, projects, receivables and hard assets.

This has macroeconomic implications. Some focus has been on whether private credit is becoming “bank-like” in a narrow regulatory sense, but the story is more whether the economy’s capacity to borrow, invest and grow is increasingly dependent on non-bank capital. The answer seems to be yes. Banks still matter, but no longer are they the sole gatekeepers of credit. Often they have become arrangers, distributors, warehouse providers or counterparties to a financing ecosystem in which credit risk increasingly sits with institutional investors.
 

The journey: from asset class to a new financial system

The growth of private credit has been striking not only in size, but also in breadth. Banks remain vital to the financial system, but their balance sheets are finite, regulated and increasingly expensive to deploy in areas requiring long-duration or bespoke capital. Private lenders have stepped in, with increasing volume, to fill the gaps. 

Institutional investors have stepped in with their liabilities often better matched to long-term credit assets. Insurers, pension schemes and closed-end private funds do not face the same daily funding profile as deposit-funded banks, making them natural owners of illiquid, amortising or long-duration credit exposures. Crucially, it also means these investors are now deciding which real-economy borrowers receive capital, how that capital is structured, and what protections are required before it is deployed.
 

New lenders, new borrowers?

The providers of credit are changing, and so are the borrowers. Nowhere is this more evident than within digital infrastructure. The AI build-out is usually seen as a technology story, but it is also a financing story. Data centres need land, power connections, cooling systems, fibre networks and significant upfront capital. These assets have infrastructure-like characteristics: high initial investment, long operational lives and revenue streams linked to contractual demand. This makes them well suited to private-market structures in a variety of forms, including senior debt, mezzanine finance and hybrid and equity-like instruments.

This same dynamic is visible within energy transition. Grid upgrades, battery storage, distributed generation, renewable projects and transmission assets all require capital at a scale that government budgets and bank balance sheets may struggle to provide alone. Private credit can help bridge that funding gap, particularly where cash flows are supported by regulated returns and long-term contracts.

The wider asset-backed finance segment is another important frontier. Consumer receivables, auto loans, equipment leases, trade receivables, music royalties and other pools of contractual cash flows can be financed through structures that sit outside traditional corporate lending. This offers investors diversification and returns linked less to a single borrower’s enterprise value and more to the performance of an underlying pool of assets.
 

For investors, the investment case is changing

Perceptions of the investment case for private credit have shifted: private credit has long been underpinned by a set of distinctive characteristics: an illiquidity and complexity premium, potentially higher yield, stronger covenants, tighter documentation control and lower mark-to-market volatility than many public credit markets. These have been longstanding attributes, and they remain central to the appeal of the asset class. They help explain why private credit can offer investors access to income, contractual protections and risk exposures often difficult to replicate in more liquid or broadly syndicated markets.  

The shift is a greater recognition of the value of particular skill sets asset managers can bring. The ability to assess borrower quality, structure appropriate protections, evaluate collateral and enforce documentation – these have always been important, but with a greater reliance on private credit now providing capital support for critical parts of the economy, these skills have assumed elevated importance.

For investors, the change is no longer viewing the private credit premium as a novelty – simply a reward for locking-up capital – it has become compensation for taking on and managing risks requiring highly specialised skills and capabilities.
 

What does this mean for portfolios?

This credit migration is leading investors to evaluate its impact on portfolio construction. The first implication is income. In a world where spreads on public corporate credit are tight and government bonds volatile, private credit appears alluring. It offers the potential for contractual income linked to loans, originated, negotiated and often held to maturity against a range of underlying assets. Its floating-rate structure further provides investors the opportunity to manage interest-rate sensitivity.

The second implication is diversification. Private markets are not automatically a diversifier: diversifying a portfolio of leveraged corporate loans may be exposed to the same economic cycle as public high yield. But the broader private-credit universe offers exposures that may behave differently: senior infrastructure debt, consumer asset-backed securities, insurance-linked financing, receivables finance and other contractual cash-flow assets. These could reduce reliance on a single source of return and hence can offer a diversifying effect.

Finally, resilience. Private credit could provide stronger documentation, tighter covenants and greater lender control than public markets, but only when investors insist on those protections. The absence of daily pricing should not be confused with lower risk. Illiquidity has the potential to be a strength when it prevents forced selling, but it can also hide deteriorating fundamentals. Resilience depends on underwriting discipline before capital is deployed, not on the reporting frequency after the fact.
 

The risks of becoming essential

To offer balance, it has to be acknowledged that the success of private credit has introduced new risks. Its rapid ascent has led to regulators paying closer attention to it than before. As recently highlighted by the Bank of England, in any future financial crisis, the new unknown is the impact private credit will have – it simply wasn’t ‘a thing’ last time around and is far less transparent than either banking or public bond markets. A downturn affecting borrowers, loan valuations or fund liquidity could create second-order effects across multiple parts of the financial system.

While these concerns may be understandable, in reality, unknowns should not automatically be equated with fragility. Most private credit is held in closed-end funds, backed by long-duration capital. These do not promise instant redemption, and managers are not forced to sell illiquid assets in falling markets. Further, while private loans may not have daily pricing, lenders receive highly detailed, borrow-level information not available to public bondholders. Private credit may appear opaque to outsiders, but it is arguably highly transparent to the investors bearing the risk.

The concentrated ownership of a private loan also creates a strong incentive for lenders to underwrite carefully and monitor diligently because they typically retain a direct economic interest in the credit they originate. More broadly, the growth of private credit reflects a dispersion of credit risk across a wider institutional ecosystem, rather than its concentration on leveraged, deposit-taking bank balance sheets. Long-horizon investors, such as pension funds, insurers and sovereign institutions can be well suited to holding certain forms of illiquid credit where exposures are appropriately underwritten, diversified and matched to their liabilities. 

Seen in this way, the migration of credit beyond banks does not imply weaker risk discipline: it represents a broader distribution of credit intermediation across institutions with different capital structures, investment horizons and risk-management frameworks, in our view.

There is also a risk of crowding. When capital floods into a strategy, the terms available to lenders can deteriorate. In direct lending, this can appear through lower spreads, weaker covenants, higher leverage or more aggressive adjustments to earnings. We note here that European private credit is less competed and key risk and control metrics are favorable to the more saturated US market. 

Liquidity also matters. Institutional investors particularly are often well placed to own illiquid assets, but liquidity needs can change. Defined benefit pension schemes mature, insurers face capital or ratings constraints, open-ended vehicles need to manage redemptions. The implication for investors is to size allocations appropriately, match them to liabilities and avoid treating illiquid assets as if they were a substitute for liquid fixed income.
 

The bigger responsibility

The great credit migration is changing the role of investors because it is changing who funds the real economy. Allocating to private markets increasingly could mean helping finance the physical and financial infrastructure of growth: the data centres powering artificial intelligence, the grids enabling electrification, the receivables supporting supply chains, the housing finance supporting households and the equipment loans that allow companies to expand.

That creates opportunity, but it also raises the standard required of investors. They must think less like passive allocators and more like long-term lenders. They need to ask not only what yield is available, but what economic function their capital is performing, how that capital is protected, and whether the return adequately compensates them for illiquidity, complexity and credit risk.

Private credit is not replacing banks, and nor should it. Banks remain central to money creation, payments, deposits and the functioning of the financial system. But the boundary between banking and asset management is shifting. Credit is no longer created only on bank balance sheets. It is increasingly originated, structured and held across a broader institutional ecosystem. 

This presents a tremendous opportunity for private credit to play a powerful role channeling capital into the real economy, supporting companies, infrastructure, energy transition projects and other productive assets. At its best, private credit can align capital with genuine economic demand, helping businesses grow, assets get built and investors achieve resilient outcomes.