Fixed-income investing isn’t traditionally considered a high-growth asset class. While debt investing is often viewed as a source of stability, opportunities for significant wealth-building can be limited. In recent years, however, the emergence of private credit has upended this long-held assumption. 

Private credit is an asset class in which investors make loans directly to companies, bypassing the traditional bank-led process. That approach has historically generated competitive returns with relatively low levels of volatility. In this article, we’ll look at the unique factors that set private credit apart, as well as the risks that this emerging asset class can bring. 

Key Points

• Traditionally, companies seeking to borrow money can either take out a bank loan or issue a corporate bond. Private credit offers a third option in which investors make loans directly to companies. 
• Over the past decade, an index of direct lending (the most dominant form of private credit) generated annualised returns of roughly 9%, compared to just over 5% for high-yield bonds. However, private credit tends to be less liquid and more opaque, which can increase risks. 
• Globally, private credit has expanded from a market of less than $200 billion in 2014 to $1.2 trillion in 2024. The UK has seen particularly strong growth, with outstanding loans climbing at an annualised rate of about 50% over that period. 
• Private credit is unlikely to replace traditional bond investing. But for investors who can manage private credit’s novel risks, this asset class could help achieve goals like higher income generation or greater capital appreciation as part of a diversified portfolio.  

It’s important to note that the content of this article is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information. Private market assets are high-risk investments that may be illiquid and long term in nature. These are high-risk investments, available to eligible sophisticated and high-net-worth investors only. You could lose all of the money you invest.

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What is Private Credit?

When a company needs to borrow money, it traditionally turns to the banking sector. Banks can either lend money directly (through a commercial loan) or help companies access the debt market (by underwriting a corporate bond). Increasingly, however, a third option is gaining popularity: private credit.

The private credit market bypasses banks entirely. Instead of taking out a bank loan or issuing a bond, companies borrow money directly from investors. Cutting banks out of the lending process can come with several potential advantages for corporate borrowers:

• Closing Speed. Closing times on private credit loans can often be significantly faster than traditional options due to reduced compliance and regulatory hurdles. As a result, companies can access and deploy capital more quickly. 
• Structuring Flexibility. Because private credit loans are negotiated directly with investors, companies can typically access more flexible financing terms. Depending on a firm’s needs, they may require customised covenants, collateral, or interest rate terms. 
• Negotiating Simplicity. Corporate bonds or syndicated bank loans can be held by dozens or hundreds of different investors, potentially requiring complex negotiations if a borrower needs to adjust their initial terms. In contrast, private credit loans are typically advanced by a single investment fund, which can make borrower-lender interactions simpler. 

These borrower benefits have helped the private credit market grow significantly over the past few years. In 2014, outstanding private credit loans amounted to about $174 billion globally. By 2024, that figure had grown to at least $1.2 trillion, a seven-fold increase. 

The majority of these loans are made in the US, but private credit has been expanding rapidly in other regions as well. In the UK, private credit went from funding just $5 billion of loans in 2014 to $46 billion ten years later, mirrored by similar growth across Europe. For private credit investors, this trend has resulted in a wider range of potentially lucrative opportunities.

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Private Credit: Potential Investment Benefits

Part of private credit’s growth is supply-driven, reflecting borrower preference for the flexibility of non-bank financing. But there’s a crucial demand-side element to this story too. Private credit investors can realize several potential benefits compared to traditional fixed-income investing:

• Higher Returns. While past performance is no guarantee of future returns, private credit has historically delivered strong performance. Over the past decade, an index of direct lending (the dominant form of private credit) generated annualised returns of roughly 9%. In comparison, indexes of high-yield and investment-grade bonds returned just over 5% and 2%, respectively. 
• Lower Volatility. Private credit loans do not trade as frequently, meaning they tend to fluctuate less than public market assets. Direct lending has historically averaged volatility levels between investment-grade bonds and short-term government debt. 
• Greater Diversification. While the risk factors of private credit do overlap with those of public market assets, they’re not identical. As a result, direct lending has an imperfect correlation to both global bonds and equities, offering diversification benefits. 

Crucially, these potential benefits must be weighed against the risks of this asset class. Private credit tends to be highly illiquid, with loans rarely changing hands. That can make it challenging for investors to quickly sell their assets.

Moreover, the opaqueness of this asset class means that investors may have trouble accessing timely information about their portfolio holdings. However, for investors who can navigate these risk factors, private credit could offer benefits as part of a diversified portfolio. 

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The Future of Private Credit: Where Next?

So far, the private credit industry has carved out a niche making direct loans to middle-market firms. These companies tend to be smaller than those in the public markets, usually with average annual EBITDA levels below $100 million. Because such firms typically do not access the corporate bond market, they represent a natural starting point for private credit.

However, as interest in the asset class grows, private credit firms are looking beyond middle-market direct lending. In fact, one area of recent growth has been making loans to large, investment-grade corporate borrowers. For example, Meta’s recent $29 billion AI infrastructure deal was largely financed by private credit. 

Private credit also continues to see particularly strong growth in the UK. In the decade to 2024, private credit loans to UK borrowers have grown at an annualised rate of roughly 50%, making Britain the world’s second-largest market. All these trends indicate that the next generation of private credit investors could have access to a more diverse set of opportunities. 

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Conclusion: A Complement, Not a Replacement 

Private credit is unlikely to serve as a comprehensive replacement for traditional fixed-income opportunities. Private credit loans tend to be illiquid, opaque, and made to potentially riskier borrowers. That stands in contrast to typical bond holdings, which are often meant to add stability to a portfolio.

Nonetheless, when it comes to achieving your financial goals, private credit is worth considering as part of a broader portfolio. If private credit’s historically strong returns continue, this asset class may be able to help investors build wealth faster. Moreover, higher yields in private credit can be attractive to income-focused investors. 

Today, private credit is usually considered just one asset class. In the future, private credit’s gradual expansion into different sectors of the lending universe may change that. This trend makes it all the more important that investors navigate private credit with experienced managers, thoughtful allocations, and a proper understanding of the associated risks. 

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Notices

Investing puts your capital at risk. The value of investments can go down as well as up, and you may get back less than you put in. Sidekick’s Private Markets products are only available to individuals in the UK who self-certify as either High Net Worth or Sophisticated Investors. These are high-risk investments that may be illiquid and long term in nature. You could lose all of the money you invest. If you're unsure whether an investment is right for you, it’s best to speak to a qualified financial adviser.

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Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern Street, London, EC2A 3EJ.

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