Private Credit – current dynamics shaping markets

When choosing between syndicated and private credit markets, financial sponsors and issuers must evaluate several key factors. The syndicated market typically features larger lender groups, public ratings, greater disclosure requirements, and valuation transparency through an actively quoted market. In contrast, private credit transactions, while lacking these characteristics, offer benefits such as stricter covenant protection, a premium for illiquidity, and enhanced structural flexibility for issuers and investors.

From an investor’s perspective, factors like liquidity, seniority, ratings, documentation, and valuation practices are critical when weighing investments in these markets. Meanwhile, issuers prioritize considerations such as execution speed and certainty, pricing, structural flexibility, and acquisition financing options. Sophisticated issuers, including private equity firms and large corporates, increasingly leverage both markets to optimize outcomes, seeking tailored solutions to meet their need.

Over the past five years, private credit markets have gained significant traction, rivalling public markets in size and scale. This shift enables large issuers – once limited to public markets – to access financing within private credit markets.

While public markets remain a robust source of capital, private credit has experienced faster growth, driven by investors’ demand for higher returns and lower volatility. By industry estimates, private credit has grown at over twice the rate of syndicated markets during this period. However, syndicated markets still maintain a scale advantage, being two to three times larger.

Success in this evolving landscape depends on experienced managers skilled in credit selection, risk mitigation, and accessing top-tier opportunities across both markets. Issuers increasingly value asset managers who can navigate both private and public markets seamlessly to offer comprehensive financial solutions.

Capital Attributable to Private Credit (Market Size, USD bn):

Private Credit Deal Size Distribution (Number of Deals per Size Category):

The convergence of private and public markets continues to accelerate as issuers increasingly move fluidly between the two. For instance, a growing business may start with private credit and later transition to high-yield bonds. This trend underscores the importance of asset managers who can adapt to such shifts, leveraging expertise across syndicated loans, high-yield bonds, and direct lending.

This flexibility is a distinct advantage. By operating across market types, we can offer clients a broader spectrum of solutions, ensuring optimal outcomes regardless of prevailing market conditions.

Syndicated Loans and Direct Lending Takeouts (USD bn):

In 2024, syndicated credit markets have regained momentum, prompting private credit strategies to pivot toward junior capital deals and smaller unitranche structures. Additionally, delayed draw term loans have become increasingly relevant as sponsors explore add-on M&A opportunities. Geographic differences, particularly between the US and Europe, also influence relative value assessments and deal origination strategies.

While the now recovered syndicated market presents competition, private credit continues to stand out for its flexibility and ability to provide specialized solutions. This adaptability allows managers to address unique market conditions effectively and capitalize on emerging opportunities.

Interest rate volatility presents nuanced challenges and opportunities. Higher rates increase capital costs for sponsors and existing portfolio companies, while also influencing sentiment and execution timelines. Despite these headwinds, credit fundamentals for well-performing companies remain stable. Importantly, elevated base rates have driven higher returns in private credit, compensating investors for bearing increased risk.

This environment underscores the importance of disciplined credit selection, with managers needing to identify resilient businesses that can weather market fluctuations while delivering strong performance.

The upper middle market remains a compelling segment for private credit investment due to its resilience and origination potential. Larger sponsor-backed businesses with established track records are less vulnerable to macroeconomic and idiosyncratic risks, making them attractive investment opportunities. Even in slower M&A cycles, this segment offers robust origination activity and realization opportunities, reinforcing its strategic importance.

As the private credit market continues to expand, the ability to foster strategic partnerships and unlock unique deal origination opportunities becomes critical. Our team has over 800 portfolio company relationships and may also leverage UBS’ global network, to access high-quality opportunities and provide tailored solutions for clients. By building strong sponsor relationships and utilizing our industry expertise, we are well-positioned to support diverse investment objectives across markets.

Looking ahead, we remain optimistic about the growth potential of private credit. With an expected pickup in M&A activity, deal volumes are likely to rise, helping to balance supply and demand dynamics. As base rates remain elevated, yields for first-lien senior secured risk continue to appeal to investors. While higher default rates demand careful credit quality management, return opportunities remain compelling for those with strong credit selection capabilities.

Private credit stands at the forefront of innovation in the debt markets, offering tailored solutions and attractive returns for investors. By bridging the gap between private and public markets, experienced managers deliver comprehensive financing strategies that align with the evolving needs of institutional investors. With disciplined credit selection, strategic partnerships, and the ability to adapt to changing dynamics, private credit remains a cornerstone of long-term investment success.