The Growth of Private Credit

March 2024

An explanation behind the rise in popularity of this all-weather asset class.

  • Structural trends, including banking regulations, interest rates, and the growth of private equity buyout transactions have contributed to the asset class’s growth
  • Investors are allocating to private credit direct lending due to its historical ability to provide
    consistent income generation, an attractive low volatility return profile, downside protection, and diversification from public markets
  • Borrowers are seeking direct lending due to the ease, speed, and simplicity of the transactions

Private credit as an asset class has existed for decades, so why is everyone talking about it now? To level-set, when we use the term private credit, we are referring to debt that is privately originated by an asset manager, without the intermediation of a bank or traded on any kind of public market.

Many will have heard experts reference today as the “Golden Age” of private credit. BlackRock, the world’s largest asset manager, reports that the asset class has more than tripled since 2015, to $1.6 trillion in assets under management, and projects that the market will hit $3.5 trillion by 20281. According to Preqin’s 2023 report on private debt, 63% of survey respondents reported that they are planning to increase their private credit allocations in the long term2.

We believe several structural trends have contributed to this growth over time.

Increased Banking Regulations: Banking regulations implemented in the 1980’s through the Global Financial Crisis forced banks to pull away from their traditional lending practices, which created a void in the market. Regulatory burdens make it very difficult for banks to lend to small and mid-sized businesses. Alternative asset managers were able to provide a stop-gap for that void. As a result, private direct lending has become an imperative source of capital for American core middle-market businesses to obtain growth financing. Borrowers are willing to pay more for private credit loans for simpler access to financing, confidential negotiations, as well as certainty of close and speed of execution.

The Search for Yield: In the wake of the Global Financial Crisis, the Federal Reserve cut interest rates dramatically to help stimulate the economy. As a result, investors were starving for yield in their fixed-income portfolios. Private credit, specifically direct lending in the core-middle market, is often structured as floating rate loans, with first lien spreads historically 500-700 basis points over the Secured Overnight Financing Rate “SOFR”. As a result, private credit can be a great way for investors to achieve yield in their portfolios in any interest rate environment. This factor has positioned private credit to become a “core” allocation within investors’ private markets portfolios. Investors appreciate private credit’s historical ability to provide current income, lower volatility, diversification benefits, and attractive risk-adjusted returns with loss rates that are comparable (or better than) public markets3. According to Christophe Fritsch, Global Head of Alternative Credit at Axa IM, “…Both institutional and retail investors are actively looking for less correlated assets, higher yields, lower volatility, downside risk management and floating-rate exposure to be defensively positioned and earn compelling risk-reward returns which alternative credit provides…”

The Growth of Private Equity Buyout Market: The rise in private equity buyout activity in the middle market has also contributed to the growth of private credit. According to research from the American University, the number of publicly traded US companies has fallen roughly 50% from 8,090 companies in 1996 to 4,266 companies in 20194. Private equity providing an alternative source of capital to the public equity markets plays a large role in this trend. Private equity sponsors partner with private credit managers to facilitate acquisition transactions. Adam Wheeler, co-head of Barings’ global private finance group, says demand for private credit has “materially grown due to the record levels of private equity dry powder in the market.” This is exemplified by 4Q 2023 direct lending buyout volume, which grew 22% since the prior quarter5.

At PennantPark, we have been investing in the core-middle market of private credit since our founding in 2007. As such, the PennantPark investment strategies have demonstrated consistent returns and downside protections throughout various market cycles. We have invested through the Global Financial Crisis, COVID-19, and regional banking failures, all with an annualized loss rate of just 9 basis points since our inception. We stick to what we know: investing in the core middle market, defined as businesses with earnings of $10 to $50 million, across five defensive sectors of expertise: healthcare, government services, software & technology, consumer, and business services.

We welcome a conversation; please contact or the professionals listed below.

1Source: The Definitive History of Private Credit, February 2024 and Markets Media: BlackRock Says Private Debt Will Reach $3.5tr by 2028
2Source: Preqin Global report 2023: Private Debt
3BlackRock Alternatives: The Growth of Direct Lending, February 2023
4Wallstreet Fintech: The Definitive History of Private Credit, February 2024
5Source: LSEG LPC’s Middle market Connect: The Middle Market Opportunity as of January 2024

PennantPark Contacts:

Managing Director; Head of Private Wealth Distribution
Senior Associate; Investor Relations & Fundraising

Important Information:

©2024 PennantPark Investment Advisers, LLC (‘PennantPark’) is an investment adviser registered with the US Securities and Exchange Commission (‘SEC’). Registration is not an endorsement by the SEC nor an indication of any specific level of skill. Products or services referenced in this document may not be licensed in all jurisdictions, and unless otherwise indicated, no regulator or government authority has reviewed this document, or the merits of the products and services referenced herein. This document and the information contained herein has been made available in accordance with the restrictions and/or limitations implemented by applicable laws and regulations.

In considering the past performance information contained herein, recipients should bear in mind that past performance is not a guarantee, projection or prediction and it is not a guarantee or indication of future results. Invested capital is at risk. There can be no assurance that any product or service referenced herein will achieve comparable results, or that they will be able to implement their investment strategies or achieve their investment objectives.

An investment with PennantPark in any advised fund is suitable only for sophisticated investors and requires the financial ability and willingness to accept the risks and lack of liquidity that are characteristic of an investment in such funds. Investors must be prepared to bear such risks for an extended period. There can be no assurance that any investment will be profitable, not lose money, or achieve the other intended purposes for which they are made. Investing with PennantPark will expose the investor to various risks including, but not limed to, the following: 1) Lack of Liquidity Risks including lack of permitted withdrawals, lack of secondary market, and lack of transferability 2) Interest Rate Volatility Risks 3) Use of Leverage Risks 4) Securitization Risks 5) Credit Market Disruption Risks 6) Investing within a Highly Competitive Market Risks 7) Default by Borrowers Risks 8) Recovery on Bad Debt Risks including cost of recovery 9) International Market Exposure Risks 10) Inflation and Deflation Exposure Risks. This is not intended to be a complete description of the risks of investing with PennantPark. Investors should rely on their own examination of the potential risks and rewards. The firm brochure (Form ADV 2A) is available online at or upon request and discusses these and other important risk factors and considerations that should be carefully evaluated before making an investment.

This document is directed at and intended for sophisticated investors. The information contained here does not constitute, and is not intended to constitute, an offer of securities and accordingly should not be construed as such. Information in this document does not constitute legal, tax, or investment advice. Before acting on any information in this document, current and prospective investors should inform themselves of and observe all applicable laws, rules and regulations of any relevant jurisdictions or obtain independent tax, legal, or investment advice.

Statements in this document are made as of the date hereof unless stated otherwise herein, and neither the delivery of this Document at any time, nor any sale hereunder, shall under any circumstances create an implication that the information contained herein is correct as of any time after such date. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. PennantPark believes that such information is accurate and that the sources from which it has been obtained are reliable. PennantPark cannot guarantee the accuracy of such information, however, and has not independently verified the assumptions on which such information is based. Certain statements contained in this Document, including without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” and words of similar import constitute “forward looking statements.” Additionally, any forecasts and estimates provided herein are forward-looking statements. Such statements and other forward-looking statements are based on available information and the views of PennantPark as of the date hereof. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results and events may differ materially from those in any forward-looking statements. Further, any opinions expressed are the current opinions of PennantPark only and may be subject to change, without notice. There is no undertaking to update any of the information in this document. No person has been authorized in connection with this document to give any information or to make any representations other than as contained in this document and, if given or made, such information or representation must not be relied upon as having been authorized by PennantPark Investment Advisers, LLC (“PennantPark”) or PennantPark’s affiliates.