The private credit market, which has expanded significantly to become a mainstream funding source for private equity-backed businesses, is undergoing a shift. The focus is moving from the scale of funds and capital deployed towards underwriting discipline and the generation of consistent returns.
This change comes as rapid growth has led to increased scrutiny, some publicised defaults, particularly in the US, and concerns about underwriting standards. The market is becoming more selective, with strong lenders prioritising relationships, diversification, and the quality of deals.
While assets under management have grown substantially, from around $380bn in 2010 to approximately $2.3tn today, investors are now asking more detailed questions about underwriting and realised returns. This is particularly relevant in the large-cap market, where competition can lead to pricing and leverage overshadowing credit quality, with median private credit margins narrowing from 6.5 per cent in early 2023 to under five per cent in 2025.
The lower mid-market is emerging as a more attractive area for direct lenders. These smaller businesses can offer strong growth prospects, and the financing dynamics allow for a greater focus on flexibility, local knowledge, and support for company growth, potentially creating a better risk-reward balance.
Europe's fragmented private credit market, with an estimated $400bn in assets under management, also presents opportunities for lenders with specific expertise. Understanding different legal systems and restructuring frameworks across countries like the UK, France, Germany, and the Benelux is becoming increasingly important.